How to Classify Debt Due on Demand
Debt due on demand, also known as demand debt, refers to a debt that can be asked to be repaid by the lender at any point, typically upon giving a certain period’s notice.
In terms of classification, debt due on demand should usually be classified as a current liability on the balance sheet, regardless of the likelihood of the lender actually calling in the debt immediately. This is because, from a legal perspective, the obligation could be called due at any moment, so it needs to be recognized as a current liability (due within one year or within the normal operating cycle of the business, whichever is longer).
However, it’s important to note that there may be some variation in how this is treated based on different accounting standards and principles. Some accounting bodies may allow for different treatment if there is clear evidence that the repayment will not be demanded within the next twelve months.
In all cases, the company should disclose the nature of these obligations in the notes to their financial statements to provide a clearer picture of their financial position to investors, creditors, and other users of financial statements.
As always, when dealing with specific accounting classifications and treatment, it’s best to consult with a professional accountant or auditor who is familiar with the applicable accounting standards and regulations.
Example of How to Classify Debt Due on Demand
Company XYZ borrows $50,000 from Bank A under a loan agreement that stipulates the bank can demand repayment of the loan at any time. This is known as a “demand loan.” Even though the bank has historically not called its loans and there is no indication that it will call this loan within the next year, the potential obligation exists.
On Company XYZ’s balance sheet, this loan would typically be reported as a current liability. Despite any subjective assessment of when the debt might actually be repaid, the fact that it could legally be due on demand dictates that it should be classified as a current liability.
So, the entry in the balance sheet would look something like this:
- Accounts payable: $20,000
- Accrued expenses: $10,000
- Short-term debt: $15,000
- Loan due on demand: $50,000
- Total current liabilities: $95,000
This classification helps provide a more conservative and accurate picture of the company’s short-term liabilities, which is helpful for creditors, investors, and other stakeholders when they assess the company’s liquidity and financial health.
And as mentioned earlier, the company should also disclose the nature of this obligation (i.e., that it is due on demand) in the notes to the financial statements.