Classification Of Assets And Liabilities

Assets and Liabilities

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:

  1. Convertibility: This classification is based on its convertibility to cash. They are current and fixed assets.

  2. Physical Existence: These are the assets that physically exist with the company. They are tangible and intangible assets.

  3. Usage: This classification is based on their usage or purpose on the business. They are operating and non-operating assets.

The Classification of Liabilities is as Follows:

  1. Current Liabilities: These are short-term liabilities and are payable within a year.

  2. Non-current Liabilities: These are long-term liabilities and can be paid after a year or even more. 

  3. 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 listed on the right side of the balance sheet. The image below shows what the balance sheet tells about a company.

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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 future are liabilities.

It is very important in accounting to ascertain whether a certain entry in the book of accounts is 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.

FAQ (Frequently Asked Questions)

1. What are Assets and Liabilities?  List the types of Assets and Liabilities.

Ans. Assets are the properties owned by the company. Liabilities are debts or legal obligations for the company. The various types of assets and liabilities are discussed below.

Types of Assets

  1. Current Assets: These are the type of assets that can be cash or the items that are easily convertible to cash equivalents. They are short-term deposits, stock, office supplies, etc.  are current assets.

  2. Fixed Assets: These are the types of assets that are non-current or that are not readily convertible to cash. For example Land & buildings, equipment, trademarks, patents, etc. are fixed assets. 

  3. Tangible Assets: These are the assets that physically exist. For example, buildings, Market securities, Cash, etc. are tangible assets.

  4. Intangible Assets: These are types of assets that do not physically exist but are beneficial in the future. For example, patents, trademarks, permits, etc. are intangible assets.

  5. Operating Assets: These are the types of assets that take part in regular day-to-day business operations. For example, cash, building, copyrights, goodwill, etc. are operating assets.

  6. Non-Operating Assets: These are not used regularly in business operations but keep generating revenue.  For example, short-term investments, interest income from fixed deposits, etc. are non-operating assets.

Types of Liabilities

  1. Current Liabilities: Company’s obligations or debts that are to be paid within one year are called short-term or current liabilities. For example, accounts payable, bills payable, income taxes payable, etc. are current liabilities.

  2. Non-Current Liabilities: Company’s obligations or debt that can be paid after one or more years. For example, deferred tax liabilities, bonds payable, capital leases, etc. are non-current liabilities.

  3. Contingent Liabilities: The liabilities that may arise depending on future issues. For example, lawsuits, product warranties, etc. are contingent liabilities.

2. What is the difference between Assets and Liabilities?

Ans. In simple terms, the assets and liabilities difference is that the assets give future benefits and liabilities give future obligations. Assets and liabilities can be differentiated on the following terms:

Meaning: Assets are items that are owned by the business whereas liabilities are items that are owned by the business.

Impact of depreciation: Assets are generally depreciable and liabilities whereas liabilities are not.

Impact on cash flow: Assets are a vital part of the inflow of cash for the business whereas liabilities tend to outflow cash from a business.

Types: Assets are of different types like tangible, intangible, current, and fixed, whereas liabilities are of non-current liabilities and non-current liabilities. 

Formula: Assets = Liabilities + Shareholder’s Equity

Liabilities = Assets – Shareholder’s Equity

Examples: Cash, building, amount receivables, goodwill, investments, etc are assets, whereas amount payable, deferred revenue, etc. are liabilities.