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The liabilities we said are what the business owes to other persons or businesses outside the business. This can be divided into two groups.

Long-term liabilities

These are normally payable over a period longer than a year. For example,

  • if you buy a car on credit, you normally have 4½ years to pay for it.
  • Borrowing money from the bank is called a loan, and then you usually have more than 12 months to pay back the loan.
  • For a building you usually have up to 20 years to pay back the loan or mortgage.

Current liabilities

You normally only have a few months to pay it off. The accounts that are part of the current liabilities are:

  • Creditors: If we buy on credit from other businesses and owe them money, they are called creditors. We normally have up to three months to pay creditors.
  • Bank Overdraft:This must be arranged with the bank manager who gives you permission to withdraw /use more money than is available in your current/cheque account. The bank charges interest for the use of their money.
  • Accrued Expenses: At the end of the financial year some of the expenses for the current financial period have not been paid. This means that you still have to pay the expense and the amount is outstanding.
For example, the account for water and electricity is only received between the 3rd and the 10th of the month.
  • Income Received in Advance: This is if you have already received income for the next financial period during this financial period for example rent received.