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Liabilities are any existing obligations that the business has to its creditors, which will ultimately result in the outflow of assets or cash to another entity. Liabilities are classified into two categories:

• Current liabilities are liabilities are due and payable within twelve months. These include accounts payable, wages and rent.

• Non-current liabilities are liabilities that are due and payable in a period over twelve months. An example is long-term loans such as mortgage repayments.

Equity is what is left after deducting all the business' liabilities from its total assets. It is classified into two categories:

• Capital contributions are made by business owners. It is important to note that creditor's claims to your business' assets take legal precedence over business owners. Hence, business owners take the ultimate risk when investing in the business.

• Retained earnings are from the business' previous profitable periods of operation. Start-up businesses don't have this during their first year of operation.