Debt Definition: Types, And Debt Characteristics in the Company

Debt or loan is a part of the group of liabilities in balance sheets. What is the definition, characteristics, and types of debt in a company? will explain in full!

Debt is an important part of everyday life and also in the world of accounting.

In a company, loans also play an important role because these loans will continue to exist and continue to grow over time.

Although almost all companies have debt, the amount of the loan is certainly different. Each company also uses these loans for different purposes.

The amount of debt that arises occurs due to a number of factors, one of the most common is to develop a business or expansion in the company.

Debt definition

In general, the definition of debt is an obligation that arises due to the purchase of goods or services on credit related to the company’s operational activities and must be paid immediately in a short period of time.

Meanwhile, the notion of debt in accounting is an economic sacrifice for the future in the form of the delivery of services and assets as part of a transaction or agreement in the past between the two parties involved.

The definition of debt according to experts cannot be separated from obligations in cash only. But it can be in the form of securities, bonds, shares, debt acknowledgments, proof of debt, and so on.

If viewed from the understanding, trade payable is carried out on credit, thus enabling the period of the debt as a classification of settlement of obligations. From the period of the debt, there are current debt, non-current debt, and bad debt.

Deeper understanding on what Debt is

Debt or loan is a mandatory dependent that must be paid due to a purchase transaction of goods or services on credit, and must be paid within a certain period of time.

In the world of accounting, a loan means an economic sacrifice for the benefit of the future in the form of the delivery of assets and services, and there has been an agreement with two parties in the past.

Experts also define the term loan as an obligation that must be paid, be it in the form of cash, securities, shares, bonds, proof of debt, debt acknowledgment letters, and so on.

According to Kieso et. Al (2008:172), debt or loan is the possibility of future sacrifices for economic benefits derived from certain obligations or entities.

He further explained that these loans provide services or send assets to transfer assets to other entities in the future as a form of past transactions.

Well, if you review all of the above definitions, business or trade loans are made with credit, which can be in the form of loans or current, non-current liabilities, and bad debts.

Current liabilities are company obligations that must be paid off before maturity. Meanwhile, non-current debt is the company’s obligations that have been paid off but experienced a delay of less than 30 days.

Furthermore, bad debts are company obligations that cannot be carried out after more than 30 days of maturity.

Therefore, a company must manage loans with good observation, planning, and assessment because this is closely related to the company’s financial management.

What are the Characteristics of Debt?

The debt repayment system is one of the problems that companies often face.

So, a company must consider the system so that financial management remains stable.

Taking out a loan doesn’t always end badly.

If the company is able to manage the loan with good and clear goals, then the company can develop to be more advanced.

However, if the loan is not used for the company’s productive needs, then the business loan will certainly make the company end badly.

In the Law of the many countries, debt is also part of securities such as commercial securities, shares, bonds, debt acknowledgments, futures participation units in securities, units of participation in collective investment contracts, and other evidence.

Types of Debt Based on Term

Types of loans can be classified based on the repayment period. There are 3 types of accounting loans based on the repayment period.

Here are the types of debt:

1. Short Term Debt

The first type of debt is short-term loans.

As the name suggests, this loan must be repaid within a short period of time or equivalent to 1 year from the balance sheet date.

In addition, the company can also repay this loan using the company’s current assets.

This type of loan is also commonly referred to as current debt because it is usually paid using sources that can make new loans.

Well, here are some sources commonly used by companies to pay off short-term debt.

  • Accounts payable. This type of loan is usually used to make purchase transactions for production materials. So, this loan is commonly used by companies in the production sector.
  • Tax debt. In addition to trade loans, there are also tax loans. This arises because every transaction in and out of a company will be taxed. Well, if the company often makes sales transactions, the tax will also be even greater. The tax must also be paid in a short period of time.
  • Cost debt. Loan fees must be repaid immediately by a company, so as not to become a burden at the beginning. Examples of expense debt are employee reimbursements, employee salaries, and others.
  • Notes payableA note loan is a loan for which there is written evidence. The company usually pays this loan according to the time agreed by both parties.

2. Medium Term Debt

Basically, there are only two types of loans in the accounting world, namely long-term loans and short-term loans.

However, because every company does not always agree to pay off loans in the long term, medium term debt emerges.

The repayment period for medium term loans is 10 years or less than 10 years.

3. Long-Term Debt

The last type of debt is long-term loans. The repayment period for this loan is up to 10 years.

Usually, this type of loan has a fairly large nominal, so the repayment time is also long and is done in installments or in stages.

The amount paid includes the loan principal and interest set by the creditor or lender.

Loan owners are usually not only large companies, but medium-sized traders such as SMEs also have loans.

This aims to develop their business or business. However, keep in mind that loan management must be correct and have clear goals for the company.

If the financial management is correct, then the loan can have a good impact on the company because it can continue to develop for the better.

Types of Debt Based on Financial Management

There are two types of debt based on financial management, namely productive and consumptive loans:

1. Earning Debt

Earning debt is a loan that is used for a useful purpose.

Examples of productive loans are loans for business capital, working capital, investment, building properties for rent, and so on.

Productive loans are usually well planned, so the borrower knows the right time to repay the loan.

2. Consumptive Debt

This type of loan is usually used for urgent and consumptive needs. That is, borrowed money is used for purposes that are not too important.

This is because borrowers take loans not to increase income or other positive things, but to buy consumer goods.

Examples of consumer goods are cars, home furnishings, motorcycles and others.

Buying such items by way of debt is not right, because these items will depreciate in value.

So, if an item is to be resold in the future, its value or price will decrease drastically. Borrowers will also suffer losses.

Manage Company Loans and Receivables with Accounting Software

Well, that’s a complete explanation of debt, starting from the meaning, characteristics, and types.

To avoid bad things happening in managing accounts payable or accounts receivable, you can use accounting software to manage it.

With accounting software, you can find up-to-date data on debt and receivables due.

Where, you can set the minimum receivable limit that will be given to customers. In addition, you can also send billing emails automatically before or after the due date.

That way, you will avoid bad debts.

The accounting software is also equipped with various features that facilitate business management, from creating invoices, managing assets, stocking goods, facilitating reconciliation, and much more.

My conclusion

As long as the asset value is still far above the debt value, it is certain that the company is still in a safe condition. However, companies must know how to manage debt so that the business always thrives.

As mentioned above, debt is a part that is always present in the company’s financial statements. For this reason, you need to carry out financial records with the best and modern methods.

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