Liabilities,debtors and creditors- pages 27

Question 1

Liability

Answer 1

A amount of money owed by an enterprise .

Question 2

An enterprise may owe money to…

Answer 2

its creditors and be owed money by its debtors

Question 3

Two types of liabilities

Answer 3

• Current liabilities

- Long-term liabilities

Question 4

Current liabilities definition

Answer 4

These are short-term debts, the money owed must be paid back within one year.

Question 5

Examples of current liabilities

Answer 5

• Bank overdraft (amount overspent on a current bank account)
• Creditors- money owed to suppliers for goods received (trade credit)
• short-term loans (less than a year)

Question 6

Long term liabilities

Answer 6

Debts that are paid back over a long period of time

Question 7

Examples of long-term liabilities

Answer 7

• Loan (bank loans with a repayment period of more than one year)
• Mortgage (taken to finance purchase of premises, often paid back over 20 years)
• the money originally invested into the business by the owner

Question 8

Debtors importance

Answer 8

It is important for the enterprise to collect all the money owed from it debtors because they will need cash to pay its creditors

Question 9

What happens if debtors don’t pay their debts?

Answer 9

The business will suffer cash flow problems

Question 10

How do enterprise’s ensure debtors pay on time?

Answer 10

The enterprise will establish a credit control system

Question 11

Creditors

Answer 11

Creditors can include those businesses who supply goods to the business

Question 12

Example of creditor

Answer 12

A car manufacturer will need to buy spare parts from a supplier for the car to be fixed

Question 13

What happens if an enterprise doesn’t pay its creditors?

Answer 13

• Suppliers refusing to supply spare parts or goods
• Services being cut off
• Future business loan being difficult to obtain
• The enterprise being declared bankrupt