What are assets and liabilities?

What are assets and liabilities?

Assets and liabilities together make up the balance sheet of a business and balance each other on it. There are different forms of assets to distinguish, such as current assets and fixed assets. On the balance sheet, assets are on the left side, the debit side, and liabilities are on the right side, the credit side.

What are assets?

Assets consist of all the possessions of a business that are usually expressed in monetary value. There is a distinction between current assets and fixed assets, with a further breakdown into financial assets, tangible assets, and intangible fixed assets.

What are current assets?

Current assets consist of assets owned by the company and listed on the balance sheet but intended for the short term. Examples of current assets: if you have a store with a stock of products in the warehouse, this inventory falls under current assets. Do you have a claim on a debtor to whom your company has provided a service? Accounts receivable are also classified as current assets. Liquid assets such as a business bank account and cash also belong to current assets.

What are fixed assets?

Fixed assets include possessions in the form of tangible assets, such as a company car, laptop, and business property. Additionally, there are financial assets that have a financial nature. An example of this is when your company owns shares in another enterprise or when there is a long-term loan issued. In the realm of intangible assets, there are non-tangible possessions, such as a patent or goodwill.

What are liabilities?

Liabilities are the debts of the business and are seen on the balance sheet on the right side, the credit side. This side shows how the company is financed. There are various components of debt that can be attributed to liabilities. An example of this is the external capital, which consists of short-term and long-term external capital. Equity also falls under liabilities, as well as any provisions or reserves.

Examples of liabilities

The equity on the liability side represents assets minus liabilities. The fact that equity is on the credit side is because it is seen as a debt to the company. Short-term external capital consists of invoices that are outstanding with suppliers, as well as pending VAT payments. These are really short-term debts.

Long-term external capital involves debts with a longer term. Think of a mortgage on a business property or a lease agreement for a company car. Provisions and reserves include items such as the potential retirement reserve. Also, a reservation for the book profit on the sale of a business asset falls under this category.