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
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.
What are liabilities and assets examples? ›
Some examples of assets are cash, cash equivalents, patents, trademarks, and machinery, while some examples of liabilities are debt, borrowings, taxes, and overdrafts.
What is asset in simple words? ›
Assets are things you own that you can sell for money. In accounting, an asset is any resource that a business owns or controls. It's anything that could be sold for money. The study of a balance sheet and assets and liabilities helps us to ascertain the equity value.
What are the three types of assets? ›
Three of the main types of asset classes are equities, fixed income, and cash and equivalents. For individual investors, these are more commonly referred to as stocks, bonds and cash. An investor's asset allocation, or mix of asset types, is the foundation of portfolio construction.
Is a car an asset? ›
Your car is considered a consumer product, and consumer products can depreciate. A car is a depreciating asset that loses value over time but retains some worth. Because you can convert a vehicle to cash, it can be defined as an asset.
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 ...
Does a bank account count as 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.
Is a house an asset? ›
Given the financial definitions of asset and liability, a home still falls into the asset category. Therefore, it's always important to think of your home and your mortgage as two separate entities (an asset and a liability, respectively). Finally, your house is your home.
Is cash considered an asset? ›
You'll need a solid understanding of assets, liabilities, and shareholder's equity to complete your balance sheet. The article has helped us understand which category cash belongs to. Cash belongs to the asset section of the balance sheet because of its liquidity.
What are your 3 best assets? ›
Your three greatest assets are your time, your mind, and your network. Each day your objective is to protect your time, grow your mind, and nurture your network.
Answer and Explanation: Although there are different types of vehicles, they all fall in the category of Fixed Assets. In general, assets that are expected to last more than a year are fixed assets.
Is a 401k an asset? ›
Your 401(k), and any other retirement accounts, are financial assets. These are portfolios in which you hold securities and investment products that have either realized or potential value.
Is cash a real asset? ›
Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets. Unlike land, property, commodities, or other tangible physical assets, financial assets do not necessarily have inherent physical worth or even a physical form.
What are the 5 major assets? ›
Generally, you should consider five broad asset classes when constructing your investment portfolio: cash, fixed-principal investments, debt, equity, and tangibles. Cash refers to the most liquid holdings in your portfolio.
What are the big 3 assets? ›
Crucially, this large and growing industry is dominated by just three asset management firms: BlackRock, Vanguard, and State Street. In recent years they acquired significant shareholdings in thousands of publicly listed corporations both in the United States and internationally.
What counts as assets and liabilities? ›
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 liability with an example? ›
Liabilities are debts or obligations a person or company owes to someone else. For example, a liability can be as simple as an I.O.U. to a friend or as big as a multibillion dollar loan to purchase a tech company.
What is a list of all assets and liabilities? ›
The balance sheet provides a picture of the financial health of a business at a given moment in time. It lists all of your business's assets and liabilities.
What are your assets and liabilities as a person? ›
An asset is something that has value and/or puts money in your pocket because it generates income and/or cash flow. A liability moves money out of your pocket and causes costs for you. Healthy financial planning means to increase your assets and keep your liabilities to a minimum.
