Article: The debt service is the total of all principal and interest paid on debts over the course of a year.  For an individual, this includes all debts that are payable in the current year.  For a business, it includes interest, any debts maturing within one year, and any principal payments on long-term debts.  Short-term debt is any debt that is due in less than one year.  The current portion of long-term debt is the total amount of long-term debt that must be paid in the current year.  Businesses do not report debt service on financial statements.  It may be reported in the notes on a financial statement. This includes all interest and principal payments that are due in the current year.  Businesses must factor in sinking fund payments, which are repayments of funds that were borrowed from a bond issue.  Also, add in lease payments that are due in the current year. Current maturities means the portion of long-term debt that will be due in the next 12 months.  You would use maturities from the previous 12 months to determine ability to cover debt service this year.  You would use maturities due in the next 12 months to project ability to cover debt service on a new loan . A company may plan to pay down a line of credit during the year.  Or, they may "term out" a line of credit that is fully extended.  Term out means that the line of credit is converted to an amortizing loan.  An amortizing loan means the balance of the loan is reduced over time by monthly payments that include principal and interest. Interest payments are tax deductible, so you will not have to pay income taxes on those.  Principal payments are not tax deductible.  You will have to adjust the total amount of principal due to account for the income taxes that will be paid on it.  Otherwise, you are understating your debt service, which in turn overstates your ability to service your debt.  Make this adjustment by using this formula: interest + (principal / [1 – tax rate]). For example, suppose a business pays income taxes at a rate of 34 percent, and has a 5-year loan for $50,000 with 6.0 percent interest.  This year, the company will pay $8,840 towards the principal and $2,760 in interest. Calculate the debt service with the above formula, using the equation $2,760 + ($8,840 / [1 - .34]) = $2,760 + $13,394 = $16, 154. Net operating income is the amount of revenue left over after operating expenses have been paid.  It does not include taxes or interest.  Net operating income is considered equivalent to earnings before interest and tax (EBIT).  It can be found on the company’s income statement. Operating expenses are those expenditures businesses incur as a result of running the business.  They include employee wages and funds dedicated to research and development.
What is a summary of what this article is about?
Determine the debt service. Include all portions of debt that are due in the current year. Include current maturities of long-term debts in debt service. Decide how to handle lines of credit and revolving debt when calculating debt service. Adjust interest and principal expenses to reflect income tax expenses. Verify net income.