A company engages in a debt transaction to seek financing for short-term operating activities or long-term expansion plans. An individual may sign a loan agreement to purchase a home or pay for college.
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A debt contract is an agreement in which you agree to repay funds to a lender. For example, in a mortgage transaction, you agree to make monthly payments to the bank. In a short-term debt contract, you must repay the loan within 12 months. The maturity of a long-term debt contract exceeds a year.
You may use debt to finance short-term purchases or long-term assets. To illustrate, you may borrow to fund operating activities if you own a start-up business or to finance college education for a relative.
Debt Accounting and Reporting
To record a debt contract, debit the cash account and credit the debt payable account. The accounting concept of debit is distinct from the banking term. In accounting parlance, debiting the cash account means increasing it. You report a debt contract in a balance sheet, also known as a statement of financial condition.
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