How to Calculate Debt From a Balance Sheet

A company’s balance sheet offers a snapshot of its financial standing at a specific moment in time. This fundamental financial statement presents what a company owns, what it owes, and the investment made by its owners. Among these components, liabilities represent the financial obligations a company has to external parties, and debt forms a significant part of these obligations.

Identifying Debt Categories on the Balance Sheet

Debt on a balance sheet is broadly categorized based on when the obligation is expected to be settled. These categories are current liabilities and non-current liabilities. This classification helps in assessing a company’s short-term liquidity and long-term financial stability.

Current liabilities encompass financial obligations that are due to be paid within one year from the balance sheet date or within the company’s normal operating cycle, whichever is longer.

Non-current liabilities, conversely, represent financial obligations that are not due within the upcoming year.

Locating Specific Debt Accounts

Within the current liabilities section of a balance sheet, several specific accounts typically represent short-term debt. Accounts payable, for instance, reflects amounts owed to suppliers for goods or services received but not yet paid. Short-term loans and notes payable are also common, indicating borrowed funds due for repayment within the year. The current portion of long-term debt is another specific account, representing the segment of a long-term loan that must be repaid within the next 12 months.

Moving to the non-current liabilities section, you will find accounts detailing longer-term financial commitments. Common examples include long-term notes payable and bonds payable, which signify borrowed money with repayment terms extending beyond one year. Mortgages payable, often related to property financing, and capital lease obligations, representing long-term commitments for the use of assets, are also typically classified here. It is important to note that while all debt is a liability, not all liabilities are considered debt for the purpose of calculating a company’s total borrowed funds; items like deferred revenue or unearned income, while liabilities, do not represent borrowed money.

Step-by-Step Debt Calculation

To determine a company’s total debt from its balance sheet, a clear process can be followed. The first step involves obtaining the company’s balance sheet. Once you have the balance sheet, locate the “Liabilities” section.

Next, systematically identify all accounts that represent current debt within the current liabilities subsection. This includes items such as accounts payable, short-term loans, and the current portion of long-term debt.

Following this, identify all accounts classified as non-current debt in the non-current liabilities subsection. Look for entries like long-term notes payable, bonds payable, and mortgages payable, as these represent the company’s longer-term borrowed funds.

Finally, sum the amounts from all identified current debt accounts and all identified non-current debt accounts. For instance, if a company has $50,000 in short-term loans and accounts payable, and $150,000 in long-term bonds, its total debt would be $200,000.