Assets and liabilities are the critical elements of any business that play a vital role in the company’s growth. Both have their own functions to work in the industry. Assets and liabilities are recorded on the balance sheet; assets are presented on the left side, whereas liabilities are represented on the right side of the balance sheet.In this article we will tell you all about assets vs liabilities.
What is a Balance Sheet
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The balance sheet is a financial statement of assets, liabilities, equity, etc., to show the company’s net worth. It compares the data of the current year with the data of the last or previous year and helps the owner find out the company’s net loss and profit. It includes assets on the left side and liabilities on the right side.It does not matter the business is small or a big one,both need a balance sheet to evaluate its net profit and loss.It also helps to examine assets vs liabilities.
What is the difference between Assets and Liabilities
In a layman’s language, the asset is that a company owns for the company’s profit in the future; for example, the owner purchases chairs for the employees, it will be considered the asset of the company as it adds value to the company.
In contrast, the liabilities are the obligations or debt on the company that it has to pay off in the future, for instance, if a company took a loan in the previous year to bear the company’s expenses and now it is needed to be paid off. To put it more simply, assets are owned by the enterprise, and liabilities are owed to the enterprise’s financial growth.
|Assets-liabilities=equity or net worth of the company(capital)|
The result after the calculation should be positive. If it comes negative it means the company has more liabilities than assets and it does not have a long life. For the survival of the business, the assets should be more than the liabilities. This equation tells us everything about assets vs liabilities.
Asset is something that the company owns to add benefits to the income of the company. Assets are reported on the left side of the balance sheet. For the company’s significant growth, the assets should be higher than the company’s liabilities.
Assets ∝ Shareholder’s equity,
Assets are directly proportional to the shareholder’s equity.This means as the assets increases the equity also increases.
Examples of the assets
Inventors, investment, cash, office tools and equipment, machinery, vehicles
Types of Assets
Assets are categorized in different parts based on their liquidity or how much time it takes to turn into cash.
Current assets are considered the liquidated assets because they take less time to convert into cash. Cash is the most liquid asset as it can be used to pay for the other services. On the balance sheet, current assets are considered first as compared to fixed assets.
Examples of Current Assets:
Cash, marketable securities, accounts receivable, prepaid liabilities, stock inventory
Fixed assets are those assets that consume time to change into cash. These are also called non-liquid assets. They turned into cash with a time duration.
Examples of fixed assets:
land, office furniture, building, vehicles such as companies truck ,Machinery
Assets that we can touch by hand or exist in physical form are called tangible assets such as cash, inventory, etc.
Which do not exist in the physical form or cannot be touched by the hands are called intangible assets, namely, accounts receivable, patents, and goodwill.
What role Assets play in a business: If a company has many assets, it means the company has good financial health. A company can grow without or with minimum liabilities if it has good assets.
The growth of a company is directly proportional to its assets.
Profit of the company= assets of the company
Liabilities are the debts and obligations on any company which it has to pay back in the future. It also plays a role in the development of a company.
For example, if a company takes a loan from the bank to support the company financially and make more profit and buy other services for the company. It becomes its liability because the company needs to pay it in the future.
Liabilities ∝ 1/shareholder’s capital
Liabilities are inversely proportional to net worth of the company, as the liabilities increases the net worth of the capital start decreases.
Types of Liabilities
Liabilities which are paid back within a year are called current liabilities, for example, loans, salaries.
Long Term Liabilities
Liabilities that are not paid back within a year or take one year or more than a year to pay off, are called long-term liabilities such as bonds payable, long-term loans, deferred compensation, etc.
What role liabilities play in a business: Liabilities play an important role in a business as they make transactions between companies more efficient. Liabilities are used in finance operations and pay for large expansions. Liabilities are inversely proportional of the company’s equity. For the more equity or net worth the liabilities should be minimum.
Difference between assets and liabilities: Now, we are giving you a summary view of the assets vs liabilities.
|These are the own items of a company for the purpose of expansion of the business.||1. These are the debts or owes of a corporation which are acquired to own more assets for a company.|
|Assets are depreciable as with the passage of time the value of an item gets decreased except land.||2. These obligations are non-depreciable as the company has to pay these liabilities in the future.|
|When the assets are increased they are debited and credited when decreased.||3. When the liabilities are increased they are credited and debited when decreased.|
|It creates a flow of money as money comes into the pocket of the owner.||4. It generates outflow of the money as money goes from the pocket of the owner.|
|Assets are recorded on the left side of the balance sheet.||5. Liabilities are represented on the right side of the balance sheet.|
|Without assets a business or corporation cannot survive.||6. Without liabilities a business can thrive for the long term.|
|Number of assets should be more than the liabilities in order to achieve more equity.||7.The liabilities should be less than the assets to get more equity.|
So these are the basic facts regarding assets vs liabilities. Both are the important pillar of a business and play a crucial role in developing the business. Their definition is different, but they work with each other in any company. If a student is from a commerce background, they should know these terms and their meanings. And if you are from those students and want an assignment on accounting, then feel free to contact our accounting assignments or comment us below.