Business Assets and Liabilities

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Assets

The term ‘asset’ signifies all kinds of resources that help generate revenue as well as receivables. Assets are resources which often help to reduce expenses, enhance profitability and generate robust cash flow as they help convert raw materials or can be converted into cash or cash equivalents. Further, being of economic value, they can be quickly sold or exchanged. Notably, such resources are reported on the left side of the Balance Sheet that is maintained by any entity involved in commercial practice.

Generally, the sum of total liabilities and equities owned helps compute the value of assets. Consequently, it can be said –

Formula: Total assets = Liabilities (accounts payable) + Owner’s equity

Liabilities

The term liability signifies all types of account payables. It can further be defined as a financial obligation that individuals must meet. Usually, the liabilities tend to play a significant role when it comes to financing expansion or ensuring smooth processing of everyday operations of commercial practices.

Further, depending on the type of a company, such liabilities can either be limited or unlimited. In the case of the former, owners are not entirely obligated to compensate or pay off for the venture’s liability, whereas in the latter, the resulting liability is solely the responsibility of the owners. The obligations of a commercial entity are reported on the right side of the Balance Sheet.

Classification of Assets and Liabilities:

Difference between assets and liabilities is assets gives you future financial benefit, and on the other hand, liabilities will give you a future obligation. The proportion of assets to liabilities should always be higher. The difference between assets and liabilities is your equity in the company. We classify these assets and liabilities into different parts. This classification of assets and liabilities helps in arranging assets and liabilities in a proper manner in the balance sheet.

Different Types of Assets and Liabilities:

 Types of Assets:

  1. Fixed Assets
  2. Current Assets
  3. Liquid Assets
  4. Wasting Assets
  5. Intangible Assets
  6. Fictitious Assets

1.Fixed Assets:

Fixed Assets are those assets which are not to be sold by the firm and to be used for a long period of time, such types of assets are also known as Long-term Assets.

For example, land and building, plant and machinery, vehicles, equipment, patents, trademarks etc., are examples of Fixed Assets.

Browse more Topics under Preparation Of Final Accounts Of Sole Proprietor

  • Trading and Profit and Loss Account
  • Balance Sheet
  • Adjustment Entries
  • Closing Entries
  • Manufacturing Account
  • Limitations of Financial Statements

2.Current assets:

Currents assets are those assets which can be converted into cash easily from the market. Generally within a year. For example cash in hand, cash at bank, trade receivables, inventory, etc.

3.Liquid Assets:

Liquid Assets are those which are already in the form of cash or can easily be convertible into cash and has a negligible effect on the price available in the market.

For example marketable securities, government bonds, certificates of deposits etc.

4.Wasting Assets:

Wasting Assets are the assets that have a useful life and as we use it depreciates with the time and after some time or years, it becomes useless.

For example Natural resources such as gas, timber, coal. The value of these assets goes down as we take out the contents. And when we take out these completely, it will become useless.

5.Intangible assets:

Intangible Assets are the assets which cannot be seen or touched. These are not necessarily useless.

For example goodwill, patents, copyrights, etc.

6.Fictitious Assets: 

The assets which are valueless but are shown in the financial statements or the expenses which are treated as assets are known as Fictitious Assets.

For example, preliminary expenses which incur at the time of establishment of the company.

(source – infonigeria)

Types of Liabilities:

We can classify the liabilities into three parts. These are:

  1. Long-term liabilities
  2. Fixed Liabilities
  3. Current Liabilities
  4. Contingent Liabilities

1.Long-term liabilities:

Long-term liabilities are those which exists for one or more than one year. For example a long-term loan from the bank.

2.Fixed Liabilities:

Liabilities which are paid at the time of termination of the business are known as Fixed Liabilities.

For example proprietor’s capital.

3.Current liabilities:

Current liabilities or short-term liabilities are those which are to be settled within a year.

For example trade payables, creditors, outstanding expenses, etc.

4.Contingent Liabilities:

Liabilities which are not actual liabilities but these can become the actual liability and it depends on the happening of certain events

List of Assets and Liabilities

Below is a list of assets and liabilities:

Assets

  • Cash (including petty cash)
  • Accounts receivable (including customer deposits)
  • Office furniture (filing cabinets, desks, sofas, chairs etc.)
  • Office equipment (photocopiers, fax machines, postage meter etc.)
  • Fixtures (sinks, lighting, faucets etc.)
  • Deferred discounts
  • Cell phones
  • Computer hardware
  • Computer software
  • Tools
  • Machinery
  • Equipment
  • Boats
  • Vehicles
  • Buildings
  • Lease agreements
  • Costs incurred to improve a leased space
  • Land
  • Modular office buildings
  • Company or customer parking lot or garage
  • Warehouses
  • Inventory
  • Any investment that matures in less than 90 days (i.e. stocks, U.S. treasuries, bonds, mutual funds, money-market funds)
  • Pre-paid insurance
  • Intellectual property (i.e. know-how)
  • Brand equity (recognition)
  • Company reputation
  • Copyrights
  • Goodwill
  • Trademarks
  • Franchises
  • Patents
  • Intellectual property
  • Domain name
  • Employment contracts
  • Licensing agreements
  • Client relationships
  • Customer lists

Liabilities

  • Accounts payable (money owed to suppliers, includes accrued payroll and accrued rent)
  • Unearned revenue
  • Customer credit
  • Credit card
  • Taxes on investments
  • Wages owing
  • Salaries owing
  • Sales tax payable
  • Interest payable
  • Income tax payable
  • Lawsuits payable
  • Customer deposits or pre-payments for goods or services not provided yet
  • Debt payable
  • Lease agreement
  • Insurance payable
  • Benefits payable
  • Contracts
  • Accrued liabilities (such as interest that the lender hasn’t billed for yet)

Assets and Liabilities Examples

For a small business owner to truly understand her company’s financial standing, she needs to be aware of what qualifies as an asset and what qualifies as a liability.

Below are examples of common small businesses and what assets and liabilities they would have.

             Freelance Copywriter

  • Assets: a laptop, a printer, cash in her business bank account, payments pending from two clients.
  • Liabilities: an outstanding balance on her business credit card from buying a new laptop, an unpaid cell phone and internet bill, sales tax she’s collected and not yet remitted to the state.                           
  • Hot Sauce Maker
  • Assets: desktop computers, hot sauce inventory, machinery and equipment used to make the sauce (including containers and cooking gear), an unpaid invoice from a local grocery store chain that sells the sauce, the building purchased to house the business.
  • Liabilities: payroll not yet paid to a staff of five, payroll and sales tax not yet remitted to the government, a bill for ingredients not yet paid, a line of credit taken out to buy new equipment, mortgage on the building.                                                                                                                                               House Painting Business
  • Assets: a company van, painting equipment, three painting contracts already in place, savings in the bank, computer and printer.
  • Liabilities: business liability insurance owing, payroll owing to a staff of ten, taxes owing, painting supplies bought on credit, a business loan taken out to buy the company van.

Relationship between Assets and Liabilities

Difference between assets and liabilities is assets gives you future financial benefit, and on the other hand, liabilities will give you a future obligation. The proportion of assets to liabilities should always be higher. The difference between assets and liabilities is your equity in the company. We classify these assets and liabilities into different parts. This classification of assets and liabilities helps in arranging assets and liabilities in a proper manner in the balance sheet.

How Assets and Liabilities play a role in business balance sheet

 The balance sheet is one of the three fundamental financial statements and is key to both financial modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. It can also be referred to as a statement of net worth, or a statement of financial position. The balance sheet is based on the fundamental equation:

Assets = Liabilities + Equity.

As such, the balance sheet is divided into two sides (or sections). The left side of the balance sheet outlines all of a company’s assets. On the right side, the balance sheet outlines the company’s liabilities and shareholders’ equity. The assets and liabilities are separated into two categories: current asset/liabilities and non-current (long-term) assets/liabilities. More liquid accounts, such as Inventory, Cash, and Trades Payables, are placed in the current section before illiquid accounts (or non-current) such as Plant, Property, and Equipment (PP&E) and Long-Term Debt. 

-Swarnima Nikam

Strengthen the foundation of knowledge and develop yourself.”

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December 2, 2020

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