 Hello and welcome to the session in which we would look at current maturities of long-term debt or current portion of long-term debt. This is part four of four of the current liability series. In the first series we looked at accounts payable and notes payable. In series number two we looked at five different current liabilities. In the third series we looked at employee-related liabilities and in this session we would look at current maturities of long-term debt. If you don't know what current liabilities are by all means go to my recording one in this series and make sure you know in details what is current liabilities. Now what is the big idea about current liabilities of long-term debt? Well we have to understand that long-term debt has a current portion. What does that mean? It means if you have a long-term debt, long-term debt, it has a current portion and a long-term portion. Well why is that relevant? Why is that important? That is important because it's going to influence the ratios. If you don't count your current, if you don't count your current portion what's going to happen? It's going to go into your long-term portion. It's going to affect your long-term ratios. Also it's going to reduce your current ratio. It's going to increase your current ratio because you have less debt. You have current, you have less current liabilities. Therefore your current ratio will go up and many banks, many investors, many lenders, they look at current ratio. Current ratio is your short-term ability to pay off your debt. So if you can take the current debt and make it long-term debt, financially you would look good and this is the purpose of it. So you want to make sure you are classifying your debt in the right place, whether it's current or non-current. And long-term debt will include notes, which is loans, bonds, mortgage notes, so on and so forth. Now when I was in practice we had a customer, I still remember him, it was a funeral home for that matter. He had 16 different notes payable and he constantly refinanced those notes. So every three months he would refinance a note and we had to prepare financial statements for him. So every quarter I had to sit down and go over 16 different loans, break the long-term portion, the long-term portion into a current portion and long-term portion and he always disagreed with my current portion because he didn't want a certain amount to be in the current portion because it's influencing his current ratio and banks did not like this. So this is why it's important. Now on the balance sheet this is what it looks like. We have a current portion of long-term debt and we have long-term debt net of the current portion. Before we examine the balance sheet, I would like to remind you whether you are an accounting student or a CPA candidate to take a look at my website farhatlectures.com. 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Share it with other connect with me on Instagram, Facebook, Twitter and Reddit. So if you notice on this balance sheet, we have a current portion of long term debt and long term debt net of current portion. So we're examining the 6,000 and this 24,000. What does that mean? It means this loan, the total amount of the loan of the long term debt, long term debt, the total amount is 24. Of that amount, 6,000 is considered short term and 24,000 is considered long term. Now, how do we come up with this 6,000 and how do we come up with the 24,000? I'm going to switch to the Excel sheet and show you a typical loan payment schedule, then show you how we came up with this conclusion. So if we look at this loan, we see the payment is $500 and we have in total 60 payments. Let's go down all the way to sell 60. We have 60 payments each $500. If we add all the payments, the total loan is $30,000. So here's what we have to do at the end of the year. We have to look at the next 12 payments and they happen to be $6,000, which is 500 times 12, $6,000. And what remained? Well, if the total debt is 30,000 minus 6,000, the next 12 payments, what's left is 24,000. So the long term portion is 24. The short term portion is 6. And this is how we break it down. We looked at the next 12 payments and we isolate them. And we're assuming those 12 payments are principle. Now, bear in mind, I'm just simplifying things. In the real world, you'll have a schedule where you have the principle amount and the interest broken down. Just to make the point, I'm keeping it, I'm keeping it simple for the illustration. Now, I hope this makes sense how we came up with the 36, with the 6,000 and the 24,000 separately. Let's also take a look at what's not included in current liabilities because that's important. It will influence the current ratio. Current liabilities, which is current debt paid by assets accumulated that have not been shown as current assets is not current liabilities. If you have a liability, although it might be current, you have to pay it now. But if the cash that you are using was set separately in some sort of a sunk fund, and that sunk fund was not considered a current asset, it's separately, maybe under other assets, its own category, then that liability is not a current liability. Why not? Because for a liability to be a current liability, it has to consume a current asset. If it's not consuming current asset, it's not a current liability. Also liabilities that's going to be refinanced or retired from the proceeds of a new debt, and that debt obviously is long term is no longer current liability. And we're going to talk about this topic a little bit more in the next session, or if the current liability is refinanced by converting into capital stock. And this is when we talked about reclassification, when do we consider a current liability, a current liability, and when we execute current liability from the current portion. And this is what we will look at in the next session. What I suggest you do is this, at this point go to my website farhatlectures.com and work multiple choice true false questions exercises that's going to help strengthen your knowledge in this topic. Again, I'm going to invite you to visit my website for the third time farhatlectures.com for additional resources that's going to help either pass your CPA exam or improve your performance at your college. Don't shortchange yourself, invest in your accounting career, it will pay dividend down the road. Good luck, study hard, and of course, stay safe.