Assets and liabilities are two major aspects of a business and a measure of its long-term viability. To explain in short, the assets and liabilities simply indicate that assets add money in and liabilities take money out.
Assets are such items that economically benefit a company. Examples of assets are buildings, equipment, inventory, and cash. They support the successful running of a business in the present and also in the future. Liabilities are always obligations of a company, which may be either the amount it owes or services yet to be performed.
All the receivables are considered assets while all the payables are considered liabilities. In a balance sheet, the investments through which revenue or profit is generated are listed under assets and the expenses or losses incurred are listed under liabilities.
Classification of Assets and Liabilities
While preparing a company’s financial statement, the classification of assets and liabilities held in the balance sheet is classified into two heads i.e., assets and liabilities. The items that the company owns and when it can give future economic benefit are termed as Assets. But, when a company owes other parties, they are termed as Liabilities.
Assets are Classified Based on:
Convertibility: This classification is based on its convertibility to cash. They are current and fixed assets.
Physical Existence: These are the assets that physically exist with the company. They are tangible and intangible assets.
Usage: This classification is based on their usage or purpose in the business. They are operating and non-operating assets.
The Classification of Liabilities is as Follows:
Current Liabilities: These are short-term liabilities and are payable within a year.
Non-current Liabilities: These are long-term liabilities and can be paid after a year or even more.
Contingent Liabilities: These liabilities may or may not arise until such an event requires.
Each of these liabilities is explained below in detail.
Define Assets and Liabilities
Assets and liabilities definitions are assets are the items that a company owns and liabilities are items that a company owes. In other words, assets provide benefits in the future and liabilities provide obligations in the future.
Accounting Assets and Liabilities
An asset is a source of economic value that a business or an individual owns expecting its future benefits. Assets are listed on the left side of a company's balance sheet and shown to increase the company’s value.
Liabilities are the company’s obligations that are yet to be completed or due for payment and are listed on the right side of the balance sheet. The image below shows what the balance sheet tells about a company.
Assets or Liabilities
The fundamental difference between assets and liabilities is that anything the company owns to give economic gains in the future is termed as assets while something that the company owes or is obliged to pay in the future are liabilities.
It is very important in accounting to ascertain whether a certain entry in the book of accounts is an asset or liability. It is based on the correct understanding of this aspect only that one can prepare a proper balance sheet with the company.
This chapter provides you with complete knowledge about the classification of assets and liabilities that are studied by commerce students and it is one of the most important topics that students should study to prepare for the final examination. After studying, these notes students should be able to questions like
What are asset and liability
Classification of assets and liability
Difference between assets and liabilities
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