What is debt?

A debt is a liability. Or we can define debt as an obligation to repay some amount of money or non-monetary resources borrowed by a party known as borrower from another party referred to as a lender. A debt applies where a business is not fully financed by equity or owners’ contribution or the owner of a business wants to take advantage of tax shield benefits.

It is necessary for leveraging of sources of finance. That is, a debt acts as a lever, which implies support. It propels acquisition of investments which in return aid in income generating activities.

Example of Debt

1st/04/2018, Moses and Moses advocates is a law firm which has just been incorporated and is need of a bank loan to enable it to start its operations. ABSA accepted to offer them a facility of $120,000 in cash as a long-term debt repayable with 10% interest for 5 years.

Required

1. Show the journal and accounting ledger entry accounts for the above transactions
2. Extract a statement of financial position and show how the debt should be recorded

Solution

On receipt of debt