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Liabilities

A business owner may obtain additional property by borrowing money to purchase the property needed or by purchasing the property with a promise to pay for that property at some future date. Those from whom business owners borrow are known as creditors. The creditor has a claim on the property until the proprietor pays in accordance with an agreement. These claims are known as the liabilities of the business.

For example, Mary Brown borrows $5,000 from a bank to enlarge the building used for her dry cleaning establishment. The bank thus becomes her creditor. This $5,000 increase in Brown's assets is accompanied by the bank's corresponding claim on her assets until the borrowed $5,000 is repaid. To fill the newly enlarged building, Brown purchases additional equipment and merchandise from the American Dry Cleaning Equipment Company amounting to $5,000; the American Dry Cleaning Company thus becomes another creditor. If Brown fails to pay this $5,000, the company can enforce its claim by legal action; this potential claim of the company on Brown's assets is another liability.


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