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Business Financials - Know the difference between Debt and Liability
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Published on Thursday, 14 April 2016 12:18
Businesses have liabilities – payments that are to be paid soon or later (long term) and it is important to know the difference between Debt and Liability.
Debt is usually meaning loans and borrowings
Liabilities are debt plus legal obligations and are divided into Current and Non-Current.
Current Liabilities are obligations due to be paid within 12 months or less of the date of a company’s balance sheet and will require the use of a current asset (eg money in bank) or will create another current liability if paid by debt or loan.
Current liabilities are usually listed in the following order:
- Credit cards and overdraft accounts, loans less than 12 months;
- Accounts payable (trade creditors);
- The remaining current liabilities such as payroll taxes payable, superannuation, income taxes payable, interest payable and other accrued expenses
Usually all the parties who are owed current liabilities are called creditors. In special situations, a legal arrangement may be created that gives preference and then those parties are called secured creditors. The majority of creditors are known as unsecured.
The amount of current liabilities is used in financial ratios such as working capital (current assets minus current liabilities) and the company’s current ratio (current assets divided by current liabilities). These give an indication of the company health.
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