What is Debt Service?
Debt service is a term given to mean the amount of principal and interest a business pays on a loan. Debt service is normally referred to on an annual basis but can be for any period.
As an example of how to calculate debt service, suppose a business has a loan of 120,000 repaid over 10 years in equal installments at an interest rate of 6%, then the principal and interest repayments for each year would be 16,304. The business would say that it’s debt service is 16,304.
The ability of a business to service its debt is estimated by comparing cash flow with its required debt repayments.
For further information on the ability to service debt see the Wikipedia definition.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.