liabilities, debtors and creditors Flashcards
(27 cards)
what is a liability?
an amount of money owed by an enterprise.
what are the 2 type of liabilities that an enterprise may have?
current and long-term
what may the enterprise owe money to?
it’s creditors
what may the enterprise be owned money by?
it’s debtors
what are current liabilities also known as?
short-term debts
what are the current liabilities?
The money owed must be paid back within one year
what are the 3 examples that can be included in current liabilities?
• a bank overdraft
• short-term loans
• money owned to suppliers for goods received
what is a bank overdraft?
amount overspent on a current bank account
what are short-term loans?
less than a year
how do you calculate current liabilities?
by adding together the value of the enterprise’s current (short-term) liabilities.
what are the long-term liabilities?
debts that are paid back over a long period of time
long-term liabilities:
bank loans with a repayment period of what?
more than one year
long-term liabilities:
why are mortgages taken out?
to finance the purchase of business premises, often paid back over 20 years
long-term liabilities:
the money originally invested in what?
the money originally invested in the enterprise of the owner
how do you calculate the long-term liabilities?
can be calculated by adding together the value of all the enterprise’s long-term liabilities
debtors and creditors:
what may the enterprise own money to?
its creditors (accounts payable) - its suppliers.
debtors and creditors:
what may an enterprise be owned money by?
debtors (accounts receivable) - its customers.
debtors:
why is it important for the enterprise to collect all the money it is owed from
it’s debtors?
because it needs cash to pay its creditors.
debtors:
what happens if debtors don’t pay their debts?
the enterprise will suffer cash flow problems
debtors:
why would an enterprise establish a credit control system?
to ensure that debtors pay their bills on time
creditors:
what can creditors include?
businesses who supply goods to the enterprise
creditors:
what will creditors purchase?
services such as electricity
creditors:
what may creditors pay back?
business loans
creditors:
If an enterprise does not pay its creditors, what could the suppliers refuse to do?
to supply spare parts or other goods
