A classified balance sheet reports current liabilities separately from long-term liabilities. Usually, a portion of a mortgage loan balance will be a current liability and a portion will be a long-term liability. The principal that will be due within one year of the balance sheet’s date is reported as a current liability. The principal that will be due after one year of the balance sheet date is reported as a long-term liability.

To illustrate, let’s assume that on December 31, 2005 a company has a mortgage loan payable with a principal balance of $400,000. During the year 2006 there will be twelve monthly payments due and each payment is $4,000—for a total of $48,000. The $48,000 to be paid in 2006 consists of $28,000 of interest payments and $20,000 of principal payments. On the company’s December 31, 2005 balance sheet $20,000 will be reported as a current liability, Mortgage Loan Payable, Current Portion. The remaining $380,000 of principal will be reported as a long-term liability, Mortgage Loan Payable, Noncurrent Portion.

Future interest payments are not reported as liabilities. Interest is reported as a liability only after the company incurs the interest expense. For example, let’s assume that the company’s mortgage payments are made on the 28^th of each month. On December 28, 2005 the company made its mortgage payment that included the interest through December 28, 2005. On the company’s balance sheet dated December 31, 2005 a current liability will be reported for the interest incurred on December 29, 30, and 31, 2005. (The interest for the year 2006 is not a liability as of December 31, 2005.)

Learn more about the Balance Sheet.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the creator of the AccountingCoach Pro which has been praised for its ability to simplify accounting in a way that anybody can understand.

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