SACE Stage 2 Accounting Practice Exam 2025 – All-in-One Resource to Ace Your Exam!

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What are liabilities?

Debt owed by the business to external parties

Liabilities are defined as the financial obligations or debts that a business owes to external parties, such as creditors, suppliers, or lenders. This definition encompasses both short-term liabilities, like accounts payable and short-term loans, as well as long-term liabilities, such as mortgages and other loans that are due beyond one year. The importance of liabilities lies in their role in financing a company's operations and growth, providing a means for businesses to acquire assets or invest in activities without having to immediately use cash.

In the context of the options provided, this choice accurately represents the essence of what liabilities are in accounting. Understanding liabilities is crucial as they impact a company's balance sheet, financial health, and ability to manage its obligations effectively.

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Assets that cannot be converted to cash

The owner's investment in the business

Personal expenses of the business

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