Tuesday, June 30, 2009

the nature of liability (1)

Liabilities may be defending as debt or obligations arising from past transaction or events, and requiring settlement at future data. All liabilities have certain characteristics in common, however the specific terms of different liabilities and the rights of the creditors vary greatly.
Distinctions among debt and equity businesses have two basic sources of financing: Liabilities differ from owner's Equity in several respects. The feature which most clearly distinguishes the claims of creditors from owner's equity is that all liabilities eventually mature- that is, they come due. Owner's equity does not the data upon which the maturity comes due is called the maturity date.
Although all liabilities mature, their maturity dates different. Some liabilities are so short in term that they are paid before the financial statements reach the users desk. Long term liabilities, in contrast, may not mature for many years, the maturity dates of key liabilities may be a critical factor in the solvency of business.
The claims of creditors have legal priority over the claims. If a business ceases operations and liquidates, creditors must be paid in full before any distributions are made to the owners. The relative security of creditor's claims, however, can vary among the creditors. Sometimes the borrower pledges title to specific assets as collateral for a loan.

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