In its simplest form, your balance sheet can be divided into two categories: assets and liabilities. Assets are the items your company owns that can provide future economic benefit. Liabilities are what you owe other parties. In short, assets put money in your pocket, and liabilities take money out!
Assets vs. Liabilities
Assets add value to your company and increase your company's equity, while liabilities decrease your company's value and equity. The more your assets outweigh your liabilities, the stronger the financial health of your business. But if you find yourself with more liabilities than assets, you may be on the cusp of going out of business.
Examples of assets are -
- Cash
- Investments
- Inventory
- Office equipment
- Machinery
- Real estate
- Company-owned vehicles
Examples of liabilities are -
- Bank debt
- Mortgage debt
- Money owed to suppliers (accounts payable)
- Wages owed
- Taxes owed
What is Liquidity?
Assets are often grouped based on their liquidity or how quickly the asset can be turned into cash. The most liquid asset on your balance sheet is cash since it can be used immediately to pay a liability. The opposite is an illiquid asset like a factory, because the selling process (converting the property to cash) will likely be lengthy.
The most liquid assets are called current assets. These assets can be converted to cash in less than a year and include cash, marketable securities, inventory, and accounts receivable. These assets generate revenue for your company.
Non-liquid assets are grouped together into the category of fixed assets. These include real estate, vehicles, and machinery. Fixed assets are owned by your company and contribute to the income but are not consumed in the income generating process and are not held for cash conversion purposes. Fixed assets are tangible items usually requiring significant cash outlay and lasting for an extended period of time.
Current vs. Long-Term Liabilities
Liabilities are also grouped into two categories: current liabilities and long-term liabilities. Current liabilities are those that are due in the next year, while long-term liabilities will not be due until at least a year later.
Current liabilities typically represent money owed for operating expenses, such as accounts payable, wages, and taxes. In addition, payments on long-term debt owed in the next year will be listed in current liabilities. For example, if you have a 30-year mortgage on your building, the next year's worth of payments owed will be listed in the current liabilities section while the remaining balance will be shown as a long-term liability.
As a small business owner, one of your most important goals will be to balance your books. That means you need a solid understanding of assets and liabilities in order to make good decisions and evaluate the health of your business. Once the terms are defined, understanding assets and liabilities is fairly easy, and the financial reports you've been generating will start to have more meaning!
Still have questions about assets and liabilities? Contact the team at Digit! We're happy to help!
FAQs
What are assets, liability and equity? Assets are things that add to your company's overall value. That could be cash, tangible assets like equipment or intangible ones like your reputation in the community. Liabilities are what you owe to others, like investors or banks that issue your company a loan.
What is asset in simple words? ›
An asset is generally any useful thing or something that holds value. Most people have personal assets, like cash, savings accounts, bonds, life insurance policies, jewelry and collectibles. A person's skills and abilities can also be an asset.
What is the difference between assets and liabilities called? ›
therefore the difference between Assets and Liabilities will represent Capital.
What is assets minus liabilities? ›
Your net worth is your assets minus your liabilities. It's what you have left over after you pay all your liabilities.
When assets become liabilities? ›
Assets become liabilities when they are transformed into obligations that a company owes to others. For example, a company may have an asset in the form of accounts receivable, which represents amounts due from customers for goods or services sold.
What is an example of an asset? ›
What Are Examples of Assets? Personal assets can include a home, land, financial securities, jewelry, artwork, gold and silver, or your checking account. Business assets can include such things as motor vehicles, buildings, machinery, equipment, cash, and accounts receivable.
Is a car an asset? ›
A car is a depreciating asset that loses value over time but can retain some worth. Vehicles immediately begin losing value once the owner takes possession.
Is a house an asset? ›
An asset is anything you own that adds financial value, as opposed to a liability, which is money you owe. Examples of personal assets include: Your home. Other property, such as a rental house or commercial property.
What are 10 liabilities? ›
Accounts payable, notes payable, accrued expenses, long-term debt, deferred revenue, unearned revenue, contingent liabilities, lease obligations, pension liabilities, and income taxes payable are the ten types of liabilities in accounting that provide information about a company's financial obligations and ...
Is a checking account an asset? ›
Assets are things you own that have value. Your money in a savings or checking account is an asset. A car, home, business inventory, and land are also assets. Each program has different rules about what counts as an asset and the total value of your assets allowed to qualify for assistance.
Net worth is the difference between the values of your assets and liabilities. The average American net worth is $1,063,700, as of 2022. Net worth averages increase with age from $183,500 for those 35 and under to $1,794,600 for those 65 to 74.
What net worth is considered rich? ›
While having a net worth of about $2.2 million is seen as the benchmark for being rich in America, it's essential to remember that wealth is a subjective concept. Healthy financial habits and personal perspectives on money are crucial in defining and achieving wealth.
Is cash an asset? ›
In short, yes—cash is a current asset and is the first line-item on a company's balance sheet. Cash is the most liquid type of asset.
What happens if assets are more than liabilities? ›
If a company's assets are worth more than its liabilities, the result is positive net equity. If liabilities are larger than total net assets, then shareholders' equity will be negative.
What are the 4 types of assets? ›
Common types of assets include current, non-current, physical, intangible, operating, and non-operating.
Can liabilities ever be more than assets? ›
If liabilities exceed assets and the net worth is negative, the business is "insolvent" and "bankrupt". Solvency can be measured with the debt-to-asset ratio. This is computed by dividing total liabilities by total assets.
What is an asset definition for kids? ›
In kid-speak, we say an asset is something we own of value. “Your assets might be your lego collection, binder full of baseball cards or even your bicycle. Assets are things that hold value and could help you in the future if you sold them.” Parents' assets might include cash, investments or real estate.
