Assets and liabilities are terms commonly used in the business world to denote property and liabilities incurred respectively. Assets are real estate or items owned by a company that adds value to the company. Liabilities are amounts owed by a company, i.e., debts that reduce the value of the company. Assets and liabilities are listed together in a financial statement called the balance sheet.
A balance sheet is a financial tool used in economics to record a company’s assets and liabilities at a particular point in time in the calendar year. Assets are displayed on the left side of the balance sheet and liabilities are displayed on the right side. Both should be the same height, so they must “balance” each other.
To know how money flows in and out of your business, it’s important to understand how the balance sheet works. A balance sheet helps you make business decisions and helps you understand the financial situation of your business. If you are looking for an investor, this financial document will give you insight and help you decide if your business is worth investing in.
Table of Contents
- What are Assets and Liabilities in Accounting?
- What is the difference between Assets and Liabilities?
- What are Assets and Liabilities Examples?
- Further Reading: Relevant Articles
- FAQs: Frequently Asked Questions
- How Do You Find Net Assets From Liabilities?
- How Are Assets and Liabilities Ordered on a Balance Sheet?
- What Are the Differences Between Current Assets and Current Liabilities?
- Is a car an asset or a liability?
- Is a bank account an asset?
- Is a house an asset?
- Is Jewellery an asset?
- Is stock an asset?
- Is land an asset?
- Is education an asset?
- Is furniture a current asset?
What are Assets and Liabilities in Accounting?
Assets and liabilities may appear side by side on a balance sheet, but they actually represent different things. Just as there are different types of liabilities, there are also different types of assets.
What are Assets?
Assets are company property, usually used in production, but can be sold at any time. There are two types of assets:
Current Assets and Fixed Assets.
What are Current Assets?
Current assets are assets that can be quickly converted into cash. This includes cash, accounts receivable, and inventory. The more working capital a small business has, the better because it can survive longer without borrowing.
What are Fixed Assets?
Fixed assets are physical item that lasts for more than one year and has monetary value to the company. For example, Computer Equipment and Tools.
Assets are also classified as tangible or intangible.
What are Tangible Assets?
A tangible asset is a physical item, something that can be seen in physical form and used in business. Examples are:
- Manufacturing Tools & Equipment
- Piece of Land
Common office supplies such as paper, computers, and printers may also fall into this category, but may not be included if they deplete over time.
What are Intangible Assets?
Intangible assets are the opposite of tangible assets, intangible rather than physical property. Like, Services or Benefits. Examples of intangible assets are:
- Exchange name
- Aspects of branding
- Network contact
- Intellectual property such as copyrights, trademarks, patents, etc.
Intangible assets are important because they are highly valuable, but they are not specifically listed on the balance sheet.
Current Assets and Noncurrent Assets
Assets are also classified as current assets and noncurrent assets according to the period in which the company expects to convert them into cash.
Current assets are assets that can be realized within the current tax period. Noncurrent assets are long-term assets that cannot be liquidated within the current tax period.
For example, inventory that a company owns but intends to sell within the current fiscal year is considered a current asset. Intellectual property, equipment, etc. used in production cannot be converted into cash within that particular year or period and are considered non-current assets.
What are Liabilities?
Liabilities are company liabilities. They include everything the company still owes: employees, customers, and investors. Examples of liabilities are expenses such as loans, salaries, and accounts payable.
Liabilities, like assets, are classified according to the period over which the liability is paid. Current liabilities refer to the liabilities of a company that must be settled within the current financial year. Long-term debt is not yet due in the current fiscal period.
For example, a current liability to be paid within a taxable period is an employee’s salary. These wage costs are considered current liabilities because employees typically receive their salary for the months they work. Examples of long-term debt are taxes or loans that are paid in stages and are not due within the current tax period.
The accounting formula (also called the basic accounting equation) is one way to calculate this net worth. To find this amount, use the following formula:
Total Assets = Total Liabilities + Equity
Equity refers to a company’s net worth (also known as “capital”).
Equity is positive, the higher the number the better. A negative number means the company is in trouble and needs to take action to minimize its debt and increase its assets.
The balance sheet should also be reviewed regularly to ensure that the company’s liabilities are not growing faster than its assets.
What is the difference between Assets and Liabilities?
Both assets and liabilities appear on the balance sheet and are essentially in balance with each other when it comes to a company’s finances. Assets are what the company owns, while liabilities are what the company still owes. They basically have opposite meanings.
Liabilities relate to a company’s outgoing operations and transactions, while assets relate to incoming operations and items of value.
The main difference between assets and liabilities is that one contributes to a company’s net worth and the other is deducted from it.
An asset is something that belongs to a company and adds value to the company. Liabilities are what a company owes to its employees, customers, or banks. When your liabilities exceed your assets, it can have a significant impact on your business, and the situation can hinder business growth.
What are Assets and Liabilities Examples?
- Cash Amount
- Accounts receivable
- Office furniture such as workstations, chairs, sofas, cabinets, etc.
- Office equipment & machinery such as Photocopy machines, Plotters, Fax Machines, Printers, etc
- Deferred discounts
- Landline Phones
- Personal Computers & Laptops
- Tools & Equipment
- Any Vehicles
- Land & Buildings
- Lease agreements
- Modular office buildings
- Parking lot, Garage, Workshop, Lab
- Warehouses & Inventory
- Stocks, Bonds, Mutual funds, etc
- Pre-paid insurance
- Intellectual properties
- Reputation of Company
- Copyrights & Patents
- Franchises & Trademarks
- Domain name
- Employment contracts & Licensing agreements
- Client relationships & Customer lists
- Accounts payable such as money owed to vendors, including accrued payroll & accrued rent
- Unearned revenues
- Customer credit & Credit card
- Tax on investment
- Wages & Salaries owing
- Sales tax, Income tax, Lawsuits, and Interest payable
- Customer deposits or pre-payments for goods or services not provided yet
- Debt payable, Insurance payable, and Benefits payable
- Lease Agreement and Contracts
- Accrued liabilities
Further Reading: Relevant Articles
Click on the below link to read relatable articles on accounting.
- What are Debits and Credits?
- What is Net worth?
- What is Asset Management?
- What are Asset Management Companies?
FAQs: Frequently Asked Questions
How Do You Find Net Assets From Liabilities?
A company’s net worth is the same as its net profit. Just as net income relates to the amount after the debt is repaid, net worth is calculated by subtracting total assets from total liabilities. For example, if assets are $50,000 and liabilities are $10,000 then net worth will be $40,000.
How Are Assets and Liabilities Ordered on a Balance Sheet?
The balance sheet shows assets on the left and liabilities on the right. Equity is also displayed under Liabilities. This layout reflects the formula:
Assets = Liabilities + Equity. Assets and liabilities can be further subdivided on the balance sheet to show current assets and current liabilities due in the financial year.
What Are the Differences Between Current Assets and Current Liabilities?
Both current assets and current liabilities relate to transactions within the immediate tax period but differ in the sense that one comes in and the other comes out. Current assets are those that are expected to add value within the current financial year and current liabilities are amounts owed during the same period.
Is a car an asset or a liability?
The vehicle itself is an asset because it is something tangible that helps you get from point A to point B and has some value in the market if you need to sell it. However, the auto loan you took out for that car is a liability.
Is a bank account an asset?
Assets are possessions that have monetary value, such as homes, cars, checking accounts, and stocks.
Is a house an asset?
A home is classified as an asset like any other object you own. An asset is something you own. This amount indicates the value of your home, whether you assign value as the price at which the home was purchased or the price at which the home could be sold.
Is Jewellery an asset?
Jewelry is considered a fixed asset, and profits from the sale of fixed assets are taxed as capital gains. Depending on how long the jewelry is held, it may be taxed as short-term capital gains or long-term capital gains.
Is stock an asset?
Stocks are financial assets, not tangible assets. A financial asset is a liquid asset that derives its value from a contractual right or title.
Is land an asset?
The land is generally classified as a long-term asset on the company’s balance sheet as it is not expected to be liquidated within one year. The land is considered the most durable commodity.
Is education an asset?
It’s usually an asset because to own it you have to pay, not always money, but sometimes in time. But once you have it, it seems to be on the razor’s edge between good and evil. If left alone, the value will begin to decline.
Is furniture a current asset?
Furniture is not a liquid asset. Furniture is a fixed asset because it has long-term benefits.