Assets and Liabilities are the core elements of the financial position of any company.
Anything which is possessed by a business can be both tangible and intangible is known as Assets. It is the important head of the financial statement of a company which is called a balance sheet. The column of assets is written on the right part of the balance sheet. In a balance sheet, the column of assets shows the total things which are owned by a business. Examples of assets are land, machine, cash, debtors etc.
The obligation (payable) on a business is known as liabilities. It can be internal or external. Like Mr A starts his business with RS. 100,000. Here 100,000 is the liability of a business which is known as internal. If he borrows from someone other than his own business is known as external liability.
The types of assets can be described under two major categories
1. Real Assets:
Assets which have some values (monetarily) are known as real assets, like bill receivable. Real assets are of two types.
- Fix assets:
Assets which are bought for the long term use and not for the purpose of sale are known as fix assets For example machinery and land etc. Fix assets can be divided into further two groups.
- Tangible assets:
Assets that have physical existence and have some monetary value For example building and furniture etc.
- Intangible assets:
Assets that have no physical existence and have some monetary value are called intangible assets. For example, copyrights and patents rights etc.
- Current Assets:
Things which become assets due to sale or to be converted into cash after some time are called current assets for example bill receivable, sundry debtors.
Current assets can further be divided into two types
- Liquid assets:
Assets that are already in cash form or can be encashed easily are called liquid assets. For example, investment.
- Outstanding assists:
Expenses which are paid in advance by a business or its owner become outstanding assets for example rent paid in advance.
2. Fictitious assets:
Assets that are having no market value are known as fictitious assets. For example – preliminary expenses.
There are two types of liability that are described below:
1. Internal liability:
A part of total obligation which a business has to pay to its owner/ owners is known as internal liability for example capital.
2. External liability:
A part of total obligation which a business has to pay to the outside of the business is known as internal liability for example Bill payable and creditor. There are three types of external liability.
- Short term liability:
It is also known as current liability. Liabilities that are payable in near future for example outstanding expenses.
- Midterm Liability:
Liabilities which are payable within one year is known as midterm liabilities for example short term loans.
- Long term liabilities:
Liabilities which are payable in long span of time is called long term liabilities for example debentures and long term loans.
Top 10 Key Differences between Assets and liabilities:
The main differences between assets and liabilities are as follows:
In a balance sheet, the object of the assets side is to shows the total property of the business and total receivable of the business while the object of the liability is to show the total payable and total equity of the business.
- According to nature:
Normally assets show the debit balance, while the liability shows the credit balance.
Some assets are the property of the business and some are receivable, while liabilities are always payable by the business, it does not matter towards its owner/ owners or to the third party.
- Tax deduction:
Tax is imposed on assets of the company while liabilities are free of it.
Some assets are depreciable due to their natures while any kind of liability is not depreciable.
The defined places to write the Assets on the balance sheet are on the right side and to write the liabilities the defined place is on the left part of the balance sheet.
In balance sheet the total of the assets calculated first while the liabilities total is calculated after the calculation of assets side.
In balance sheet assets are take place as current assets at first and fix assets at last while in liability side the current liabilities are at first and long term liabilities are at last.
The equation of assets is
Assets = Capital + Liabilities
While the equation of liabilities is
Liability = Assists – Capital
- Increase and Decrease Effect:
If assets increase they will show the debit balance and if they decrease they will show credit balance while if liabilities increase they will show credit balance and if they decrease they will show debit balance.
If you want to learn about Stock Market then we recommend you having a look on A complete guide for beginner in Stock Market.
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