The Difference Between Assets and Liabilities
Assets are resources owned by a company or individual that are expected to provide future economic benefits, including generating income or holding value. In contrast, liabilities represent financial obligations or debts that a company or individual must settle, which may involve the outflow of resources or services.
In this article about the difference between assets and liabilities, you will learn about assets and liabilities in everyday life.
Table of Contents
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- What is the Difference between assets and liabilities?
- About Assets
- What is Liabilities in Accounting?
Before learning the difference, you should learn what is assets and liabilities in detail.
What is the Difference between Assets and Liabilities?
In this section of the article, you will get to know about the difference between assets and liabilities.
| ASSET | LIABILITIES |
| These reflect the net gain in value. | These represent a net loss in value. |
| Total assets are listed on the left side of the balance sheet. | Liabilities are listed on the right side of the balance sheet. |
| Assets = Liabilities + Shareholder’s Equity | Liabilities = Assets – Shareholder’s Equity |
| Depreciable | Non-depreciable |
| These are the items that are possessed by a business to provide its benefits in the future. | These are items that act as obligations for any business. |
| Assets are tangible, intangible, current and non-current assets | There are non-current and current liabilities. |
| Cash, Goodwill, Investments, Account Receivable, and Building, are examples of assets. | Accounts payable, Deferred revenue, Interest payable are some examples of liabilities. |
| It generates cash flow for the business. | It is responsible for cash outflow for the business. |
About Assets
Assets are resources that can generate cash flow, provide future economic benefits, and reduce expenses for an entity. These have economic value that benefits business operations, increases business value and even enhances an individual’s net worth. Assets can be tangible assets and intangible assets that you can liquidate in the long term or for day-to-day business operations.
The following are different types of assets:
- Current assets: These are highly liquid assets that can be converted into currency. Financial assets such as mutual funds, cash, bonds, and stocks are some of the most liquid current assets. For businesses, current assets include accounts receivable, cash, inventory, and prepaid expenses.
- Fixed assets: These are also known as hard or long-term assets that have low liquidity and take a long time to get converted into currency. Fixed assets are often not sold at the desired value.
- Tangible assets: These assets are real properties that are tangible in nature. Tangible assets include cash, real estate, inventory, machinery and furniture. Most tangible assets are also current assets.
- Intangible assets: These are items or goods that exist physically. Some examples of intangible assets include permits, intellectual property, patents, brand reputation, and trademarks, which have their value boosted through successful use.
- Operating assets: These are the assets that generate revenue through day-to-day business operations and help in maintaining workflow. These operating assets may include licenses, copyrights, inventory and machinery.
- Non-operating assets: These assets are business-owned items that help in generating revenue but may not be used for day-to-day everyday operations. These may include vacant land or short-term investments.
Characteristics of Assets
The following are the characteristics of Assets:
- Reported on the balance sheet of a company.
- Created or bought for increasing the value of a firm.
- Used for generating cash flow, reducing expenses, and improving sales.
What is Liabilities in Accounting?
Liabilities are the financial obligations towards parties outside the business. These may be corporate and small business liabilities such as monetary debt that are grouped under accounts payable on cash flow statements.
The company’s liabilities include short-term or current liabilities. These liabilities must be paid within one year. On the other hand, long-term liabilities or non-current liabilities can be paid in more than one year. These also include contingent liabilities that are to be paid under certain circumstances. The following are the different types of liabilities:
Current Liabilities
Current liabilities or short-term liabilities are debts that must be paid within a year. Following are the examples of current liabilities:
- Bills payable
- Interest payable
- Short-term loans
- Accrued expenses
- Accounts payable
- Income taxes payable
- Bank account overdrafts
Non-current Liabilities
Non-current or long-term liabilities are debts that are due for more than one year. These are crucial for a company’s long-term financing. Companies can acquire immediate capital to fund the purchase of capital assets through these liabilities. They can also invest in other capital projects.
They can also help the company’s long-term solvency. In case the company is unable to repay these long-term liabilities on the due date; the company will have to face a solvency crisis.
Read more on the functions of financial management
The following are the types of non-current liabilities:
- Bonds payable
- Capital leases
- Mortgage payable
- Deferred tax liabilities
- Long-term notes payable
Contingent Liabilities
Contingent liabilities are the probable liabilities that depend on the outcome of a future event. Also known as potential liabilities, these liabilities may have a negative impact on the future net profitability and cash flow of the company. There is also a chance that these liabilities may not stand in the future. It is possible to estimate the amount of the resulting liability.
Characteristics of Liabilities
The following are the characteristics of liabilities:
- Payable for short and long term
- Settled by future transfers or asset use
- Characterized as a transaction that obligates the entity/event which has already occurred
- Not necessarily legally enforceable
Examples of Liabilities and Assets
Following are the examples of liabilities and assets:
Assets:
| Cash and cash equivalents | Accounts receivable |
| Inventory | Investments (stocks, bonds, etc.) |
| Property, plant, and equipment | Land |
| Buildings | Vehicles |
| Machinery and equipment | Furniture and fixtures |
| Intellectual property (patents, trademarks, copyrights) | Goodwill |
| Prepaid expenses | Notes receivable |
| Marketable securities |
Liabilities:
| Accounts payable | Short-term loans |
| Long-term loans | Mortgages |
| Bonds payable | Accrued expenses |
| Wages payable | Taxes payable |
| Interest payable | Unearned revenue |
| Leases | Pension obligations |
| Warranties payable | Customer deposits |
| Deferred tax liabilities |
FAQs
How do assets and liabilities affect a company's balance sheet?
A balance sheet lists a company's assets, liabilities, and equity. Assets must be equal to the sum of liabilities and equity, reflecting the accounting equation: Assets = Liabilities + Equity. This balance shows the financial health of the company.
Can an item be both an asset and a liability?
An item cannot be both an asset and a liability. However, different aspects of the same item can be classified differently. For example, a leased vehicle may be an asset for the lessor and a liability for the lessee.
Why is it important to distinguish between assets and liabilities?
Understanding the difference between assets and liabilities is crucial for accurate financial reporting and analysis. It helps in determining the financial health and stability of a business, guiding investment decisions, and strategic planning.
How does depreciation affect assets?
Depreciation is the process of cost allocation of a tangible asset over its useful life. It decreases the value of assets on the balance sheet over time and is a way to account for the deterioration or obsolescence of the asset.
What role do liabilities play in business operations?
Liabilities represent future economic outflows and are crucial for business operations. They can provide necessary funding for expansion or cover operational costs, reflecting a company’s financial obligations.
How do assets and liabilities relate to liquidity?
Assets, particularly current assets, contribute to a company's liquidity - its ability to meet short-term obligations. Liabilities, especially current liabilities, represent the obligations that need to be met in the short term.
Can an asset become a liability?
While assets and liabilities are distinct categories, an asset can sometimes become a liability. For example, a piece of equipment (an asset) that becomes obsolete and costly to maintain could be considered a liability if it's draining resources without providing value.
How do assets and liabilities affect a company's balance sheet?
Assets are listed on the left side or top of a balance sheet and represent what a company owns. Liabilities are listed on the right side or bottom and represent what a company owes. The difference between assets and liabilities is the company's equity or net worth.
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