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Monday, January 9, 2012

The Role of Debt

ehow

The Role of Debt

Marquis Codjia

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.

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By Marquis Codjia, eHow Contributor

The Role of Debtthumbnail


Debt helps a company secure financing to fund operations and long-term investments.

Debt plays a significant role in modern economies. All institutions, including philanthropic organizations and government entities, may rely on debt to fund operations in the short term and long term.

  1. Definition

    • A debt is either a liability that a borrower must repay when due. It also may be a monetary obligation that a company must honor on time. A debt may relate to a short-term or long-term agreement.

    Economic Role

    • Debt plays an important role in the economy. Businesses usually need short-term or long-term financing because internal funds are insufficient to cover operating needs. Additionally, customers may not pay for goods on delivery.

    Short-Term Debt

    • A short-term debt is a loan that a borrower must repay within 12 months. Examples include accounts payable, taxes due and short-term loans. Short-term debt affects a firm's working capital. Working capital, a measure of short-term cash availability, equals current assets minus current liabilities.

    Long-Term Debt

    • A long-term debt is a loan or financial guarantee that a borrower must repay after a year or more. Examples include corporate bonds, long-term loans, overdraft arrangements, lines of credits and convertible bonds.

    Accounting for Debt

    • Generally accepted accounting principles and international financial reporting standards require a borrower to record debt at market value. To record a new loan, an accountant debits the cash account and credits the debt payable account. In accounting terminology, debiting an asset, such as cash, means increasing its balance.

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