How to Calculate Total Debt (With Example)
By Indeed Editorial Team
Updated July 23, 2021
Published February 25, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Small business owners want their businesses to succeed, especially when there is a great amount of time and money involved. The best way to track your expenses each month is through the use of a balance sheet, which includes the total debt or liabilities a business has. In this article, we discuss how to calculate total debt, learn the different parts of a balance sheet and take a look at a basic example.
What is total debt?
Total debt is calculated by adding up a company's liabilities, or debts, which are categorized as short and long-term debt. Financial lenders or business leaders may look at a company's balance sheet to factor in the debt ratio to make informed decisions about future loan options. They calculate the debt ratio by taking the total debt and dividing it by the total assets.
Related: 16 Accounting Jobs That Pay Well
How to calculate total debt
You can find the total debt of a company by looking at its net debt formula:
Net debt = (short-term debt + long-term debt) - (cash + cash equivalents)
Add the company's short and long-term debt together to get the total debt. To find the net debt, add the amount of cash available in bank accounts and any cash equivalents that can be liquidated for cash. Then subtract the cash portion from the total debts.
Related: 6 Essential Accounting Skills
Types of liabilities to include
Business owners incur liabilities to run their business, especially in the beginning. Once more established businesses start generating a bigger profit, they can start to pay down any long-term debts. However, having recurring short-term liabilities, especially where payroll is concerned, is quite common. Here are some examples of short and long-term liabilities that might be included in a business’ total debt:
Short-term debt is classified as debts that need to be paid as soon as possible or before a 12-month period has passed, including:
Current portion of long-term debt
1. Accounts payable
Found within a company's general ledger, accounts payable represents a short-term debt that a business owes to its creditors, suppliers and others. Items in this account could include bills from credit card companies, landscaping services, office supply warehouses and more.
2. Wages payable
With employees on the payroll, businesses have a running wages payable account that includes the amount earned but not yet distributed in the form of a paycheck. Payment typically follows after the pay period in which hours were recorded.
3. Short-term notes
These debts accrue interest each month until paid in full within the year or term of the agreement. Like checks, short-term notes or promissory notes contain terms that have been negotiated between the lender and borrower.
4. Deferred revenues
Anytime a business accepts prepayment for a service, such as cleaning the building, shredding documents, or providing a yearly online service at an upfront cost, it is categorized as deferred revenue. Until each month's services has been redeemed, the service is deferred.
5. Current portion of long-term debt
The CPTLD is found on the section of a company's balance sheet that displays the total amount of long-term debt that should be paid by the end of the year.
A company may owe $200,000 with $40,000 due for payoff in the current year. An accountant would record the $160,000 as long-term debt and $40,000 as CPLTD.
This can be any kind of loan a company has received to operate a business that surpasses a 12-month period.
Deferred income taxes
1. Long-term loans
Long-term loans are typically loans with repayment periods of 60 to 84 months. People seek these types of loans for things like cars or personal loans for medical bills and home renovations. However, home loans and student loans can be anywhere from 10 to 30 years in length. The faster these get paid off the better, as interest continually accrues throughout the life of the loan.
Related: Your Guide to a Career in Finance
2. Capital leases
A capital lease is a temporary loan that allows renters to use the asset for the life of the lease in exchange for payment. The leased asset is subject to depreciation over the life of the lease.
3. Pension liabilities
When employees retire within a company, some are entitled to pension plans. A company's pension liabilities can be calculated by taking the difference between the total amount owed to the retirees and the actual amount of money the company has available to make those payments.
4. Bonds payable
This item on the company's balance sheet refers to long-term debt typically issued by large corporations, government agencies and hospitals to generate cash. The bonds are a form of an IOU, where debts must be paid within a specified time. Bonds typically mature within a year, but each bond can contain a maturity date of its own.
5. Deferred compensation
This refers to an arrangement in which a company pays a portion of an employee's earnings at a later date. For instance, this is the case with pension and retirement plans, plus stock-option plans.
6. Deferred income taxes
This is the difference between income recognized by tax laws and income recognized by a company's accounting department.
Balance sheet example
Businesses large and small have a different set of expenses associated with running their brand. Depending on their financial history, their balance sheets may be simple or contain more complex rows. What all balance sheets have in common is a list of assets and liabilities that should balance out. Here is a basic example of a balance sheet created by a small business that provides specialty party balloons:
Elite Balloon Company Balance Sheet — June 30, 2019
Accounts receivable - $20,000.00
Petty cash - $3,000.00
Checking account - $6,000.00
Inventory - $15,000.00
Prepaid insurances - $6,000.00
Total current assets - $50,000.00
Computer software - $2,000.00
Building - $125,000.00
Total noncurrent assets - $127,000.00
Total assets - $177,000.00
Accounts payable - $10,000.00
Line of credit. - $22,000.00
Wages payable- $7,000.00
Total current liabilities - $39,000.00
Long-term bank loan - $48,000.00
Total liabilities - 87,000.00
Retained earnings - $55,000.00
Owner's capital - $35,000.00
Liabilities and equity - $177,000.00
From this example of a balance sheet, you can easily find the amount of total liabilities highlighted above. Elite Balloon Company has a total debt of $87,000. This amount is the sum of its short- and long-term debt. Simplify the process of creating a balance sheet for your company by using accounting software.
Jobs for those who calculate total debt
If you're interested in working in finance and evaluating an organization's total debt, there are many jobs for you to consider. Here are 10 jobs that calculate total debt in their roles:
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