Liabilities

Current Liabilities

This is perhaps the section of the balance sheet that people look at first. This section represents all money that the business owes to others that has to be paid within a year. If a business has a lot of current liabilities, it could face a liquidity crisis - will it be able to pay all its short term debts? We will consider this more when we look at the current and acid test ratios.

Included in current liabilities are:

• Overdrafts - money owed to the banks to repay short term borrowing
• Trade creditors - money owed to suppliers for inputs, raw materials etc. As mentioned, businesses usually pay their suppliers after taking delivery of items
• Taxation - businesses will owe the government money in the form of taxes and this is a current liability

Long Term Liabilities

These are debts that will not fall due for over a year - they give the business a little more 'breathing space.' They will all have to be paid eventually but do not represent as much of a worry in terms of liquidity. If a business has to have debt, it may prefer to have long term, rather than current, liabilities.