Assets vs. Liabilities: Key Differences

Assets are resources or items that a company, enterprise or even an individual can control, and these items can be sold or used to obtain a specific price or value in the market. Broadly, there are two major categories of assets, tangible and intangible, although these further comprise many different types of assets which will be discussed later.

A tangible asset could include any item, product or real-estate property, gold and even liquid cash. So if someone owns a flat or a plot of land, that is a tangible asset to them. A car, or some expensive equipment that can yield a hefty value when sold, is also an asset meaning that these items can give you financial benefits in the future.

A singer or an artist or a writer usually holds copyrights to their artistic works, albums and books. A scientist or designer can also file patents for their scientific work, innovations in design and breakthroughs in their work. All of these comprise intangible assets. When and if necessary, such assets can be sold, or used to increase the amount of money the individual or the company has.

Definition of Liabilities

Liability can be implied as something that can be owned. To be specific, when it comes to business enterprises, liability is the amount of money that a business owes to several other companies.

Liability is very simple, something that is “owed”. To be specific, when it comes to business enterprises, liability is the amount of money that a business owes to several other companies. For example, a fried chicken chain outlet produces several kilos of fried chicken and food items every day. They obtain or buy their chicken and other raw materials from an external company or business. This secondary business is the “supplier”. Till the fried chicken outlet pays their chicken supplier for all the chicken and raw supplies, the company will have a liability meaning, a certain sum of money, say one lakh rupees will be recorded for the time and amount due. 

Do you know that assets and liabilities can be classified into several categories? 

Classification of Assets and Liabilities

The following section will throw further light on the types of assets and liabilities.

Types of Assets

Here are the several different types of assets.

• Current Assets

Assets that can be converted into cash (the process is called liquidity) within a year are called current assets. In a balance sheet in accounting, current assets are always placed at the top. Several items can be considered as current assets which include – 

a. Cash and equivalents of cash

b. Short-term investments, such as high-yielding savings accounts or government bonds.

c. Inventories of raw materials and finished goods that can soon be converted into cash are also considered as current assets.

d. Assets held for sale and foreign currency that a person possesses are examples of very high-yielding current assets.

To Understand the Classification Better, Study the Following Table:

•  Non-current Assets

Fixed assets that cannot be converted into cash instantly are known as non-current assets. These provide long-term financial benefits to the owner, business or enterprise.

Non-Current Assets Include – 

a. Employee benefits provided to employees by companies and organizations, such as Provident Funds are non-current fixed assets that can yield a large amount of money after a fixed maturity period.

b. Goodwill amongst businesses and customers and between businesses is actually a lesser-known non-current asset.

c.  Real-estate property, plants, trees, orchards and equipment – all of these count as non-current assets.

d.   Intangible assets such as moral copyrights and patents.

e.   Investments in associate companies and joint ventures.

f.    Long-term financial assets such as fixed deposits.

• Fictitious Assets

Losses incurred and expenses that couldn’t be recorded during the financial year are considered fake assets. Some examples of fictitious assets are.

a. Promotional expenses on items

b. Discounts on the issue of shares

c. Preliminary Expenses

Task for you: Try to find different types of assets, which are not mentioned in the article, classified under each categories

Types of Liabilities

There are mainly two types of liabilities; let’s have a look at them.

• Current Liabilities

Short-term liabilities that can be easily paid off within a year are called current liabilities. Several items can be considered under short-term liabilities.

a.  Short-term financial debts that a person or a business owes 

b.  Payable accounts

c.  Sales taxes that need to be paid

d.  Payable interests

e.  Provisions to be made for an enterprise or business

• Long-term Liabilities

Liabilities that can be paid off over the course of many years come under the umbrella of long-term liabilities or non-current liabilities. These may be – 

a. Long term debts

b. Employee benefits

c. Other long-term payable accounts

To Help Understand, Study The Following Table:

Liabilities are an essential part of any organization. Try to find some other expenditures that can be labeled as liability.

Difference Between Assets and Liabilities

After learning the different types and examples of liabilities and assets, it’s time to take a quick look at the differences and compare the similarities.

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