Internal and External Liabilities
Liabilities are obligations a business owes to external or internal parties. As per the accounting equation liabilities are equal to the difference between assets and capital. For example, if Business A sells goods to Business B on credit, the amount owed by B to A is treated as a liability.
Internal Liability – All obligations which a business has to pay back to internal parties such as promoters (owners), employees etc. are termed as internal liabilities. Examples – Capital, Salaries, Accumulated profits, etc.
External Liability – All obligations which a business has to pay back to external parties i.e. lenders, vendors, etc. are termed as external liabilities. Example – Borrowings, Creditors, Taxes, Overdrafts, etc.
Short Quiz for Self-Evaluation
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