Difference between Assets and liabilities

What Are Assets?

An asset is a resource that has some economic value to a company and can be used in a current or future period to generate revenues.

These resource take many forms from cash to buildings and are recorded on the balance sheet until they are used. Once these resources are used or spent, they are  transferred from the balance sheet to the income statement and called expenditures.

Some most common examples are:

  1. Cash and Equivalents
  2. Accounts Receivables
  3. Inventory

1. Cash and equivalents

Cash is any currency in the possession of the business. This could be cash in a register, money in the bank, or treasure bills in a safe deposit box. These liquid assets can be used to purchase any other resource, settle debts, or pay investors.

2. Accounts Receivable

Many businesses allow customers to purchase goods on account and pay for them at a future date. Accounts receivable is the acknowledgement that the customer owes the company money for the goods.

3. Inventory

Inventory is merchandise that the company intends to sell for a profit. This Merchandise could be purchased or manufactured by the company.

Properties of an Asset

There are three key properties of an asset:

  • Ownership: Assets represent ownership that can be eventually turned into cash and cash equivalents.
  • Economic value: Assets have economic value and can be exchanged or sold.
  • Resources: Assets are resources that can be used to generate future economic benefits.

Classification of Assets

Assets are generally classified in three ways:

  1. Convertibility: Classifying assets based on how easy it is to convert them into cash.
  2. Physical Existence: Classifying assets based on their physical existence( tangible vs. intangible )
  3. Usage: Classifying assets based on their business operation usage.

1. Convertibility

If assets are classified based on their convertibility into cash, assets are classified as either current assets or fixed assets.

1. Current Assets

Current assets are assets that can be easily converted into cash and cash equivalents. Current assets are also termed liquid assets and examples of such are :

  • Cash
  • Cash equivalents
  • Short-term deposits
  • Inventory
  • Marketable securities
  • Office supplies

2. Fixed or Non-Current Assets

Non-Current assets are assets that cannot be easily and readily converted into cash and cash equivalents. Non- current assets are also termed Fixed assets, long-term assets.  Examples of non current of fixed assets are are:

  • Land
  • Building
  • Machinery
  • Equipment
  • Patents
  • Trademarks

2. Physical Existence

If assets are classified based on their physical existence, assets are classified as either tangible assets or intangible assets.

1. Tangible Assets

Tangible acids are acids with physical existence, which we can touch, feel and see them. Examples of tangible assets include:

  • Land
  • Building
  • Machinery
  • Equipment
  • Marketable securities

2. Intangible Assets

Intangible assets are assets that lack physical existence. Examples of intangible assets are:

  • Goodwill
  • Patents
  • Brand
  • Copyrights
  • Trademarks

What are Liabilities

A liability, in financial and economic terms, refers to a company’s obligations to anyone other than the entity itself, which it is liable to right of sometime in the future.

Liability is a primary expect of any business organization and is often a definitive metric to gauge a company’s financial standing and well being.

Examples are : Creditors, bank loan, etc.

Classification of liabilities

These are the 3 main classifications of liabilities:

  1. Current liabilities (short-term liabilities)
  2. Non-current liabilities
  3. Contingent liabilities

1. Current liabilities

Current liabilities also known as short term liabilities, are debts or obligations that need to be paid within a year. Current liabilities should be closely watched by management to ensure that the company possesses enough liquidity from current assets to guarantee that the debts or obligations can be met.

Examples of current liabilities are:

  • Accounts payable
  • Interest payable
  • Bills payable
  • Babk account overdrafts
  • Short -term loans

2. Non-current liabilities

Non-Current diabetes also known as long term liabilities, are debts or obligations due in over a year’s time. Long-term liabilities are an important part of a company’s long-term financing.

Companies take on long- term debt to acquire immediate capital to fund the purchase of capital assets or invest in new Capital projects. Long- term liabilities are crucial in determining a company’s long-term solvency.

If a companies cannot repay their long term liabilities as they become due, the company will face a solvency a crisis.

Examples of non- current liabilities are:

  • Bond payable
  • Long- term notes payable
  • Deferred tax liabilities
  • Mortgage payable
  • Capital leases

3. Contingent liabilities

Contingent liabilities are liabilities that may occur, depending on the outcome of a future event.  Therefore contingent liabilities are  potential liabilities.

Examples of contingent liabilities are:

  • Lawsuits
  • Product warranties

Difference between Assets and liabilities

  1. In an accounting context, assets are the property or estate which can be transformed into cash in the future, whereas liabilities are the debt that is to be settled in the future.
  2. Assets refer to the financial resources, which provide future economic benefit. Conversely, liabilities are those financial obligations, which require being paid off in the near future.
  3. Assets are depreciable objects, i.e. every year a certain percentage or amount is deducted as depreciation. As against this, liabilities are non-depreciable.
  4. In the balance sheet, assets are shown on the right side, While liabilities are placed on the left. Further, the Total Assets and total liabilities should tally.
  5. Assets are classified as current and non-current assets. On the other hand, Liabilities are classified as current and non-current liabilities.
  6. Examples of assets- Trade receivables, Building, Inventory, Patent, Furniture, etc. and Example of liabilities-  Trade payable, Debentures, Bank loan, Overdraft, etc.
  7. Assets can be understood as the items of property, which an individual or company owns. They have a specific value and can be utilized to meet obligations like Debt, commitment, and legacies. On the other hand, liabilities refer to the obligations of an individual or entity, which are required to be fulfilled, in the future.
  8. Assets other items your company owns that can provide future economic benefit, whereas liabilities are what you owe other parties.

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