Liabilities, debtors and creditors

Question 1

What is a liability?

Answer 1

A liability is an amount of money owed by an enterprise

Question 2

A liability is an amount of money owed by an enterprise.
How many types of liabilities will an enterprise have?

Answer 2

An enterprise will have two types of liabilities:
1) Current liabilities
2) Long-term liabilities

Question 3

A liability is an amount of money owed by an enterprise.
An enterprise will have two types of liabilities: Current liabilities and Long-term liabilities.

The enterprise may …

Answer 3

The enterprise may:
1) Owe money to its creditors
and
2) Be owed money by its debtors

Question 4

What are current liabilities?

Answer 4

Current liabilities are short-term debts

Question 5

Current liabilities are short-term debts.
The money owed must be paid back within how long?

Answer 5

The money owed must be paid back within one year

Question 6

Current liabilities are short-term debts.
The money owed must be paid back within one year.
What may current liabilities include?

Answer 6

Current liabilities may include:
1) A bank overdraft (the amount overspent on a current bank account)
2) Short-term loans (less than a year)
3) Money owed to suppliers for goods received (trade credit)

Question 7

What are long-term liabilities?

Answer 7

Long-term liabilities are debts that are paid back over a long period of time

Question 8

Long-term liabilities are debts that are paid back over a long period of time.
What may long-term liabilities include?

Answer 8

Long-term liabilities include:
1) Bank loans with a repayment period of more than one year
2) Mortgages taken out to finance the purchase of business premises, often paid back over 20 years
3) The money originally invested in the business by the owner

Question 9

Calculating current liabilities:
How can the value of current liabilities be calculated?

Answer 9

The value of current liabilities can be calculated by adding together the value of the enterprise’s current (short-term) liabilities

Question 10

Calculating long-term liabilities:
How can the value of long-term liabilities be calculated?

Answer 10

The value of calculating long-term liabilities can be calculated by adding together the value of all the enterprise’s long-term liabilities

Question 11

The enterprise may owe money to its creditors - its what?

Answer 11

The enterprise may owe money to its creditors - its suppliers

Question 12

The enterprise may owe money to its creditors - its suppliers. It may also be owed money by its debtors - its what?

Answer 12

The enterprise may owe money to its creditors - its suppliers. It may also be owed money by its debtors - its customers

Question 13

Debtors:
Why is it important for the enterprise to collect all the money it is owed from its debtors?

Answer 13

It is important for the enterprise to collect all the money it is owed from its debtors, because it needs cash to pay its creditors

Question 14

Debtors:
It is important for the enterprise to collect all the money it is owed from its debtors, because it needs cash to pay its creditors.
If debtors don’t pay their debts, the business will …

Answer 14

If debtors don’t pay their debts, the business will suffer cash flow problems

Question 15

Debtors:
It is important for the enterprise to collect all the money it is owed from its debtors, because it needs cash to pay its creditors.
If debtors don’t pay their debts, the business will suffer cash flow problems.
To ensure that debtors pay their bills on time, what will an enterprise do?

Answer 15

To ensure that debtors pay their bills on time, an enterprise will establish a credit control system

Question 16

Creditors:
Creditors can include those businesses who …

Answer 16

Creditors can include those businesses who supply goods to the business

Question 17

Creditors:
Creditors can include those businesses who supply goods to the business.
A car manufacturer, for example, will need to do what?

Answer 17

A car manufacturer, for example, will need to buy spare parts for the production line

Question 18

Creditors:
Creditors can include those businesses who supply goods to the business.
A car manufacturer, for example, will need to buy spare parts for the production line.
It will also purchase …

Answer 18

It will also purchase services such as electricity

Question 19

Creditors:
Creditors can include those businesses who supply goods to the business.
A car manufacturer, for example, will need to buy spare parts for the production line.
It will also purchase services such as electricity and may have to do what?

Answer 19

It will also purchase services such as electricity and may have to pay back business loans

Question 20

Creditors:
Creditors can include those businesses who supply goods to the business.
A car manufacturer, for example, will need to buy spare parts for the production line.
It will also purchase services such as electricity and may have to pay back business loans.

If an enterprise does not pay its creditors, what could it result in?

Answer 20

If an enterprise does not pay its creditors, it could result in:
1) Suppliers refusing to supply spare parts or other goods
2) Services being cut off
3) Future business loans being difficult to obtain
4) The enterprise being declared bankrupt