Liability: If an amount is due to be paid to any other person or institution other than the owner it is called a liability.
Liability is basically an obligation that is still not paid as on 31st March. Liabilities can be classified into the following:
- Long Term Liabilities
- Current Liabilities
- i) Long-term liabilities: In the course of business, there will be certain obligations as on 31st March which is payable for more than one year or after a long term.
For example; Long-term loans from banks, Debentures, etc.
- ii) Current liabilities: There are some liabilities where the obligation has to be repaid within a year such as obligations or liabilities which are payable in near future are called Current Liabilities. Example – Goods sold on credit to Suppliers have to be repaid within a year. This is a current liability.
Some other examples include – Creditors, bank overdrafts, bills payable, short-term loans, etc.
Liabilities whether Short Term or Long Term are transferred to the Balance Sheet.
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Debt: Debt refers to the amount of money that must be returned, whereas financing refers to the provision of cash for commercial purposes. The fact that you do not lose ownership of the firm is a key element of debt financing.
Good Debt: A ‘Good Debt’ is one that can be repaid without default.
Bad Debt: During the condition of Declined revenue, a firm with a high amount of debt may be unable to make interest payments. As a result, the company will be in danger of insolvency. It may eventually be a ‘Bad Debt’.
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