{"id":527,"date":"2023-04-18T11:58:10","date_gmt":"2023-04-18T11:58:10","guid":{"rendered":"https:\/\/www.smallbizgenius.net\/?p=527"},"modified":"2023-06-19T08:58:29","modified_gmt":"2023-06-19T08:58:29","slug":"assets-vs-liabilities","status":"publish","type":"post","link":"https:\/\/www.smallbizgenius.net\/knowledge-base\/assets-vs-liabilities\/","title":{"rendered":"Assets vs. Liabilities: Definition and Examples"},"content":{"rendered":"\n
Any business planning to stay on top of its bookkeeping<\/a>, accounting, and financial modeling, needs to account for its assets vs. its liabilities. Regardless of the type of business account<\/a> you\u2019re dealing with, these will be presented on your balance sheet.<\/p>\n\n\n\n In this article, we take a deep dive to understand these core business components: What they mean, how they can impact a business, and what to consider before acquiring either.<\/p>\n\n\n\n From an accounting perspective, assets are defined as resources or goods a business, individual, or government owns that help generate revenue, add long-term benefits and value to the business, reduce expenditure, or increase its value. Anything with economic value for a company or the ability to increase an individual\u2019s net worth, is an asset.<\/p>\n\n\n\n Defining assets in accounting terms takes the element of control into consideration: Assets are also items or resources owners can sell or use to obtain something else of value. The three requirements something must satisfy to be classified as an asset are:<\/p>\n\n\n\n Some examples of assets are cash and cash equivalents, unpaid invoices, investments, equipment, patents and trademarks, property, etc.<\/p>\n\n\n\n From an accounting perspective, liabilities are obligations or payments a business or individual has yet to make good on. These may be monetary, or in the form of services yet to be rendered. A liability must have the following three elements:<\/p>\n\n\n\n All businesses have liabilities, except in peculiar cases where the company only receives and makes cash payments. Liabilities can include loans, salaries, accounts payable, sales taxes, unearned revenue, credit card bills, customer credit, etc.<\/p>\n\n\n\n Assets are grouped based on their convertibility, physical existence, usage, and ownership. These classes are current and fixed\/non-current assets, tangible and intangible assets, operating and non-operating assets, personal and business assets, fictitious assets, and investment assets.<\/p>\n\n\n\n Current assets consist of funds and items or resources that can be quickly converted to cash (i.e., liquidity), typically within one year. They are also referred to as liquid or short-term assets, and include, but are not limited to, cash, cash equivalents, office supplies, short-term deposits, inventory, marketable securities, and unpaid invoices or accounts-receivable assets.<\/p>\n\n\n\n Fixed\/non-current assets provide long-term value but cannot be converted to cash as quickly and efficiently as current assets. They are also referred to as long-term assets and include, but are not limited to, patents, trademarks, land property, and heavy machinery and equipment. The value of fixed assets tends to depreciate over time and with use (e.g., cars).<\/p>\n\n\n\n Tangible assets are physical in the sense that they can be seen, touched, or felt. These assets are also easy to convert to cash where it becomes necessary for a business or individual to do so. Some examples are vehicles, inventory, and office equipment.<\/p>\n\n\n\n Not to be confused with fictitious assets, intangible assets are those assets that exist without the physical element, i.e., they cannot be seen or felt, but have economic value. They are also harder to convert to cash and include logos, copyright, patents, trademarks, etc.<\/p>\n\n\n\n Operating assets are those through which revenue is generated for daily business operations, for example, paying liabilities like wages owed. Such assets include cash, accounts receivable, inventory, and fixed assets.<\/p>\n\n\n\n Non-operating assets generate value, but not for the daily operations of a business. In this category, you\u2019ll find things like investment securities, unused equipment, land, or property, etc. <\/p>\n\n\n\n As the name suggests, personal assets are those belonging to private individuals. They are controlled by their owner and do not fall under the company\u2019s purview.<\/p>\n\n\n\n On the other hand, business assets are owned by a company and cannot be used for private purposes. Decisions concerning the management of business assets need to be made by the company\u2019s leadership, as these are meant to maintain the economic growth of the business.<\/p>\n\n\n\n Fictitious assets, like intangible assets, lack a physical element; as their name suggests, they\u2019re not real assets – instead, they\u2019re cash expenditures than haven\u2019t yet been accounted for, but are expected to generate revenue in the future. By definition, fictitious assets have an expiration date: Examples include discounts on shares, promotional and marketing costs, and preliminary costs.<\/p>\n\n\n\n These are assets that have the primary purpose of generating a profit and boosting the investment portfolio of an individual or business. Examples of assets in this class are stocks, bonds, and currencies.<\/p>\n\n\n\n Investment assets can either be growth assets or defensive assets. Growth assets are those with high potential to bring bigger short-term gains (e.g., property and volatile stocks), while defensive assets provide smaller, but stable, revenue (e.g., debt securities and savings accounts).<\/p>\n\n\n\n Classifying assets based on their convertibility, physical existence, usage, and ownership is not merely a matter of convenience or unnecessary accounting terms. Understanding the nature of an asset helps business owners and private individuals determine what assets to invest in.<\/p>\n\n\n\n For example, knowing the difference between operating and non-operating assets paints a clearer picture of how they contribute to a business\u2019s revenue. The solvency of current and fixed assets must be considered before acquisition in case of inevitable situations that rely on liquidity. When assets are acquired without proper consideration, they can become current or long-term liabilities without warning.<\/p>\n\n\n\n Liabilities can be current or short-term, non-current or long-term, and contingent liabilities.<\/p>\n\n\n\nAssets<\/h2>\n\n\n\n
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Liabilities<\/h2>\n\n\n\n
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Asset Classification<\/h2>\n\n\n\n
Current and Fixed\/Non-Current Assets<\/h3>\n\n\n\n
Tangible and Intangible Assets<\/h3>\n\n\n\n
Operating and Non-Operating Assets<\/h3>\n\n\n\n
Personal and Business Assets<\/h3>\n\n\n\n
Fictitious Assets<\/h3>\n\n\n\n
Investment Assets<\/h3>\n\n\n\n
The Importance of Asset Classification<\/h2>\n\n\n\n
Liability Classification<\/h2>\n\n\n\n
Current or Short-Term Liabilities<\/h3>\n\n\n\n