Explain the following terms: (a) Liabilities (b) Capital.

(a) Liabilities – Liabilities are the obligations which are payable by the business to outsiders except owners. They are of two types:

1. Long term liabilities – They are usually payable after a long period i.e. more than one year. E.g. – term loan, debentures etc.
2. Current Liabilities – They are the obligations which are payable within a period of one year. E.g. – creditors, bills payable etc.

(b) Capital – Capital is the money or money's worth invested by the owner in the business and which he can claim. It is a liability towards the owner. It is also known as owner's equity or net worth.

Capital = Assets – Liabilities