As a business owner, you should understand the fundamental difference between assets vs. liabilities. The more you classify assets and liabilities properly, the more you can take informed business decisions that can increase and sustain the profitability of your company, and avoid debt and losses.
Assets vs. Liabilities
In simpler terms, an asset is what you own and liability is what you owe in business. Robert Kiyosaki, the famous author of Rich Dad Poor Dad, says– “Assets put money in your pocket, whether you work or not, and liabilities take money from your pocket.”
To understand the difference between assets and liabilities in financial accounting, you should understand their meanings first.
What are Assets?
Assets are items, resources, goods, or anything that a company owns that provides future economic benefits. Assets contain an economic value that generates revenue and increases the value of your company.
There are six types of assets and they are current assets, fixed assets, tangible assets, intangible assets, net operating assets, and non-operating assets.
Assets appear on the left side of a balance sheet.
Examples of Assets
Types of Assets
Although there are several types of assets in accounting, the most important are current and fixed assets.
Current Assets: The assets that can be consumed, sold, exhausted, or converted in less than a year (current fiscal year) are considered current assets. Some current assets examples are cash, cash equivalents, accounts receivable, inventory, marketable securities, and other similar liquid assets.
Fixed Assets: The assets that are purchased for the operations of a business for the long term and couldn’t be converted in less than a year are considered fixed assets. Some fixed assets examples are land, buildings, equipment, software, furniture, vehicles, computers, devices, etc.
What are liabilities?
Liabilities are something a company owes to another entity, usually a sum of money or services. It is a legally binding obligation that has to be paid or fulfilled.
There are four types of liabilities and they are current liabilities, non-current liabilities, contingent liabilities & capital.
Liabilities appear on the right side of a balance sheet.
Examples of Liabilities
Types of Liabilities
Even though there are several types of liabilities in accounting, the most prominent are current and fixed liabilities.
Current Liability: The liabilities that are short-term and due to be paid in less than a year (current fiscal year) are considered current liabilities. Some of the examples of current liabilities are accounts payable, salary/wages, payroll taxes, rental dues, interest amount, dividends, etc.
Fixed Liability: The liabilities that are long-term and due to be paid after one year (current fiscal year) are considered fixed liabilities. It is also referred to as long-term liability and non-current liability. Some examples of fixed liabilities are debts, loans, mortgages, bonds, pensions, leases, etc.
Assets and Liabilities Examples
Classifying an asset and liability properly is what makes a business owner understand the true financial standing of his or her company. Below are some of the examples to help you understand the assets vs. liabilities of certain small businesses.
1. Coffee Shop Business
Assets: coffee-making machinery/equipment, coffee inventory, computers, POS machines, furniture, building, and vehicles.
Liabilities: Employee wages, payroll taxes, sales tax, supplier bills, bank loan, and mortgage of the building.
2. Pest Control Business
Assets: A company van, pest control equipment, computer, printer, and current or recurring client contracts.
Liabilities: Wages, payroll taxes, vehicle loans, payments of chemicals and supplies, and business liability insurance.
3. Freelance Graphic Designer
Assets: Laptop/desktop with the high-end graphics card, laser color printer, camera, designing software and tools, bank balance, and pending payments from clients.
Liabilities: Internet bill, software license, credit card payments, sales tax remittance, etc.
4. SAAS Business
Assets: Office building, furniture, computer hardware and software, printers, food vending and coffee making machine, pending client contracts, patents, technology, licenses, contracts, and brands.
Liabilities: Employee compensation, internet expenses, phone bill, software costs, building mortgage, payroll taxes, services to be rendered, business loan, etc.
Assets vs. Liabilities vs. Equity
A balance sheet of a company can help the owner to determine the financial strength as well as understand the market value of the company.
Assets, liabilities, and equity are the major components of a balance sheet, which provides a complete snapshot of a company’s financial condition and is widely considered one of the most essential financial statements for any business.
The equity equation which is also referred to as the assets and liabilities equation is as follows:
Equity = Assets – Liabilities
Some other variations of the accounting formula may help you in the calculation of the value of your assets or liabilities when you have two parts of the equation.
Assets = Liabilities + Equity
Liabilities = Assets – Equity
Debt Ratio= Liabilities / Assets
We hope you may have understood the difference between assets vs. liabilities. Always remember that assets and liabilities are vital parts of a balance sheet, which provides a clear picture of a company’s financial position.
The health of a business can be measured by the balance sheet – assets, liabilities, and owner’s equity. Using CheckMark MultiLedger, you can easily create the balance sheet and generate comparative reports with ease and convenience.