Difference Between Assets and Liabilities

Edited by Diffzy | Updated on: May 31, 2023

       

Difference Between Assets and Liabilities

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Introduction

The terms “assets" and "liabilities" represent two significant terms in finance and accounting. Although both terms may appear to be similar to the layperson, in reality, this isn't the case in any way.

An asset essentially refers to the financial (or economic) value of the property or other items owned by a corporation or an enterprise. Like everything else in life, assets' worth is also depreciated yearly.

In contrast, liability is used to describe all the obligations and debts of a business or organisation expressed in terms of economic or monetary values.

Assets vs Liabilities

The primary distinction between Liabilities and Assets is that an asset owned by a company can potentially be valued as an asset. Liability refers to any debt that the company owes to any person or organisation. Assets are depreciated over time, while liabilities do not get depreciated.

Difference between the Assets and Liabilities in tabular form

Parameters of comparisonAssetsLiabilities
DefinitionAny future obligations of cash benefits that one business or business will have to pay to another company or enterprise as a result of the past events or transactions is referred to as a liability.Any future obligations of cash benefits that one business or business will have to pay to another company or enterprise as a result of past events or transactions is referred to as a liability.
Future ValueIt is prone to depreciate each year.Any future obligations of cash benefits that one business or business will have to pay to another company or enterprise as a result of past events or transactions is referred to as a liability.
Classified asFixed Assets, Current Assets, Wasting Assets, Liquid Assets, Intangible Assets, Fictitious Assets.Long-term Liabilities, Fixed Liabilities, Contingent Liabilities, and Current Liabilities.
Calculated asCapital + LiabilitiesAssets - Capital

What are Assets?

In financial accounting, everything belonging to an entity or company is referred to as assets. To make it more precise, assets are something tangible or intangible owned by a business and can generate some value.

It is possible to say that assets reveal the value of ownership, which is easily changed into money. In essence, assets can be classified into tangible assets and intangible assets. The former are not physical resources, while those are physically based or resources that can be affected. The real assets can be further divided into fixed or current assets.

A good example of fixed assets is structured, and as an example, current assets are inventories of various kinds. When talking about intangible assets, they generally comprise patents, copyrights, and goodwill.

A few examples of assets that can be found on your company's balance sheet are buildings, goodwill land, materials such as accounts receivable equipment, petty cash and land improvements, prepay insurance inventory, short-term investments, and cash.

Types of Assets

Assets are usually classified into three categories they are:

Convertibility Classifying the assets according to the ease they can convert to cash.

Physical Existence classifies the assets according to their physical condition (in other words, tangible assets vs tangible assets).

Use: Classifying assets based on their purpose/use in business.

Classification of Assets: Convertibility

In the event that assets can be classified based on their ability to convert into cash, assets are classified as either tangible or fixed assets and the fixed asset. Another way to describe this notion is short-term—longer-term assets.

Current Assets

The current assets can be transformed into cash and equivalents (typically within a year). They are also referred to as liquid assets.

Examples of them include:

  • Cash
  • Cash equivalents
  • Short-term deposits
  • Accounts receivables
  • Inventory
  • Marketable securities
  • Office equipment
Fixed or Non-Current Assets

Non-current assets are those that are not quickly and easily transformed into cash or cash equivalents. They are also referred to as permanent or long-term assets and hard assets.

 Examples of fixed or non-current assets are:

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

Classification of Assets: Physical Existence

If assets have to be classified based on their physical presence, they are classified as either tangible or tangible assets.

Tangible Assets

Tangible assets have a physical presence (we can feel, touch and even feel them, and even). Some examples of tangible assets are:

  • Land
  • Building
  • Machinery
  • Equipment
  • Cash
  • Office equipment
  • Inventory
  • Marketable securities
Intangible Assets

Intangible assets are those which do not exist physically. Examples of assets that are intangible include:

  • Goodwill
  • Patents
  • Brand
  • Copyrights
  • Trademarks
  • Trade secrets
  • Permits and licenses
  • Corporate intellectual property

Classification of Assets: Usage

If assets have been classified based on their purpose or use, they are classified as one of two categories: operational or non-operating assets and operating support.

Operating Assets

Operating assets are the assets needed in the day-to-day operations of a company. In terms of operating assets, they are utilised to generate revenue from the principal business activities.

 Some examples of these operating assets are:

  • Cash
  • Accounts open
  • Inventory
  • Building
  • Machinery
  • Equipment
  • Patents
  • Copyrights
  • Goodwill
Non-Operating Assets

Non-operating assets are those that aren't required to support daily business operations. However, they still generate revenue. The types of non-operating assets are:

  • Investments for a short-term duration
  • Marketable securities
  • Vacant land
  • The interest income earned from fixed deposits

What are Liabilities?

As there's an excellent aspect to every situation, there's also a negative side to balancing every element. Keeping this in mind, you'll find the list of liabilities against those of assets that appear on the balance statement.

When we talk about liabilities, they are all the obligations owed by an organisation. They usually the amount due by a business to its creditors in connection with past transactions.

Like assets, liabilities can be classified into various types. They include current, contingent, fixed, and long-term obligations.

The long-term risk is bank loans. Fixed liabilities involve the capital of the proprietor. Contingent liabilities comprise bill discounts, lawsuits and investigations in progress.

However, current liabilities comprise creditors' trade payables and outstanding expenses.

Types of Liabilities

Current Liabilities

Current liabilities also referred to as short-term liability, are the debts or obligations that must be paid within the following year. Current liabilities must be carefully monitored by management to make sure that the business has enough liquid assets from the existing assets to ensure that obligations or debts are fulfilled.

Examples of liabilities that are in the present:

  • Credit card accounts
  • Interest payable
  • Income taxes payable
  • Bills payable
  • Bank account overdrafts
  • Accrued expenses
  • Loans for a short-term duration

Current liabilities are an essential element in many quick-term liquidity measurements. Here are some examples of the indicators that management teams and investors consider when analysing the financials of a business.

Non-current Liabilities

Non-current liabilities, also referred to as long-term liabilities, are obligations or debts due to overtime. Long-term obligations are an essential component of a company's long-term financing. Companies borrow on long-term bonds to raise capital immediately to finance the purchase of capital assets or invest in new capital projects.

Long-term liabilities are essential in determining a company's ability to meet its long-term obligations. If companies cannot repay their long-term debts when they mature, then the business will be faced with an issue of solvency.

List of non-current liabilities

  • Bonds payable
  • Long-term notes payable
  • Tax liabilities that are deferred
  • The mortgage due

Contingent Liabilities

Contingent liabilities can be incurred based on the outcome of an upcoming event. So contingent liabilities could be liabilities. For instance, if an organisation is facing an action for $100,000, the business could be liable if the lawsuit is successful.

If the lawsuit fails and is unsuccessful, no liability will occur. According to accounting principles, contingent liabilities are only documented when the harm is likely (defined as being more than 50% probable to happen). The amount of damage can be calculated.

Examples of contingent liability:
  • Lawsuits
  • Warranty on the product

Short-term Liabilities

Short-term liabilities are obligations which must be settled within a year, and that's why they are known as current or short-term liabilities.

The management should keep an eye watch on the short-term obligations to ensure that the company has sufficient liquidity to pay any debts related to these obligations within a shorter timeframe.

Below are the top commonly used kinds of short-term liability:

Accounts Payable

The only liability that many small businesses carry on their balance sheet at the beginning is accounts payable.

Principle and Interest Payable

The principle and the interest payable refer to any amount due towards repayment of a mortgage or loan.

While the loan is considered a long-term obligation, the interest and principal payments are short-term obligations because they have to be paid within a specified timeframe, typically not more than a year.

Although the loan could be a 30-year loan, most of the loan payment, including principal and interest, is due each month, making them an obligation for the short term.

Taxes Payable

According to your time frame for payment and taxation, taxes are due quarterly, monthly or annually. However, both income and state taxes are short-term obligations. State and income taxes must be paid within the year timeframe, making them short-term commitments.

Long-term Liabilities

Long-term liabilities are loans that don't have to be paid over 12 months (1 year). All long-term debts are extra than one year in the forthcoming. They are commonly called non-current liabilities.

These are the most typical kind of long-term liabilities that are listed on the balance sheet.

Long-term Notes Payable

Notes payable are very like accounts payable, except in the length of conditions for payment.  If a formal loan contract has terms for payments that extend over twelve months (12 months), This is known as a note payable.

As previously mentioned, account payables are obligations that must be paid within the timeframe of a year. The most common types of payable notes could be buying a company vehicle or a loan provided by the bank. Notes payable are any document that contains a written commitment to pay a specific amount at a future date.

Main Differences Between Assets and Liabilities in Points

Here are the key difference between assets and liabilities

  • Any resources controlled by a business that could be used for future financial benefits or uses are called assets. This is essentially the result of a previous deal or event. However, the liabilities are the obligations of a business that the business is expected to repay in the years to be. They are also because of past transactions and are generally future expenses for an enterprise.
  • Like the lifespan of any good thing decreases over time, the worth of assets also decreases regularly. In the case of the liabilities, no depreciation is observed.
  • In financial accounting, the assets are debited whenever they can increase. At the same time, liabilities are more likely to be credited when there is an increase in their value. However, the reverse would occur when there is a reduction. In this case, assets are credited while liabilities are debited.
  • Diverse types of assets are fixed assets, assets that are intangible liquid assets and fictitious assets. However, liability can be classified as long-term obligations and fixed liabilities, current liabilities, and contingent liabilities.
  • Assets are regarded as beneficial from a commercial point of view since they increase cash flow in the next few years. While liabilities cause an outflow of cash in the next few years, they are thought to be flawed from an economic perspective.
  • When creating the balance sheets, each asset is first placed, and when all purchases are calculated, the liabilities are computed.

Conclusion

In the end, we conclude that It is possible to claim that liabilities and assets are two faces on the one side referred to in financial accounting. A business cannot continue to thrive without the creation of capital assets. In the same way, if the business is unable to meet its obligations and responsibilities, it won't be able to expand in the years to come.

To thrive in business, A company must use its assets properly and consider liabilities to boost its number of assets.

But it's much more complicated than it sounds. There are many uncontrollable elements that businesses have to deal with, which can occasionally force companies to choose legal liability as the last option.

References

  • https://groww.in/p/liabilities
  • https://fundsnetservices.com/types-of-liabilities

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