Assets vs Liabilities

The main components of any business are its Assets and Liabilities. 

The purpose of these two elements is to extend the life of the business. In this post we will break down what Assets and Liabilities are in a way that is very easy to comprehend. 

You remember when you were in basic school and based on accounting principles you were taught that Assets are items or elements that provide future benefits to the business while Liabilities are items or elements that organizations are obligated to pay off in a near or distant future? Well that is very correct.

Let’s get more information on them now, shall we? 

What are Assets? 

In basic terms, Assets are things that continually put money in your pocket for a period of time. An example will be when an organization invests in a portfolio or instrument(s) that give them value of about 5 years. This simply means that they have put money into something that would keep giving them returns for the next 5 years. It is that simple. 

There are different types of assets however, in order to understand how assets work, it is important that you know the different types.   

Types of Assets

• Current Assets

These are simply cash or assets that are expected to be turned into money within a year. Examples are; cash, short-term investments, inventories, foreign currencies and so on.

 

• Non-Current Assets

These are assets that are in most cases, fixed in nature and not expected to be easily converted into cash within an accounting period (one year). Examples are; properties and equipment, financial assets, deferred tax assets and others.

 

• Tangible Assets

These are assets that are significant in nature. They have a form of physical existence. Examples will be; Land, buildings, cash, equipment, plant amongst others.

 

• Intangible Assets

Reverse is the case in this aspect. Unlike tangible assets, intangible assets are assets that have value but no physical existence. Examples are; trademarks, copyrights, goodwill and others.   

What are Liabilities? 

Liabilities are simply obligations that take money out from your pocket. An example is the case of an organization that takes money from shareholders to run businesses and have them earn profit so they can return to the investors. In a situation whereby they run out of cash in the process and go out to borrow loans to meet up with the deadline for repaying investors, the money borrowed in this case is a liability for the organization. 

As an individual, if you occupied a space, could be office or home space, and you are yet to pay for the rent of that space, the rent you owe is called a liability. 

Note that Liabilities are not exactly expenses. Read more here. 

Types of Liabilities 

There are two main types of liabilities, let’s briefly look at them.

 

• Current Liabilities

These are liabilities that are short-term and can be paid off within a year. Examples are; financial debts, short-term loans, amongst others.

 

• Long-Term Liabilities

Like the word long-term implies, these type of liabilities are often long-term and can be paid off for more than a year or over a long period of time. It is also called non-current liabilities. Examples are; long-term financial debt, deferred tax liabilities amongst others. 

Assets and Liabilities are core principles to understand  when it comes to business and finance and we hope that this post has helped to simplify these terms well enough. 

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