ASSETS AND LIABILITIES

Assets and Liabilities
Assets and Liabilities

When entering the financial and accounting universe, some nomenclatures can make certain topics appear more complex than they really are. This is the case of so-called assets and liabilities. Assets and liabilities are part of a company’s accounting and are recorded in the balance sheet, an accounting report that demonstrates the organization’s financial and economic position.

Assets are assets, such as cash, furniture and real estate, machinery, stock of goods, and rights. It is the possessions of a person that can be capitalized and, over time, generate income for their owner. For example, stocks and bonds.

Liabilities are obligations, that is, expenses incurred by the company. It refer to items of ownership that generate costs, maintenance or expense; they are, in general, the debts and obligations that a person has to pay. 

WHAT IS AN ASSET?

For a company, the asset corresponds to the left side of the balance sheet and is made up of the company’s assets. It consists of goods such as: money, real estate, equipment and goods.

For each individual, the asset represents the money he has available and everything that allows him to generate income: shares, interest on time deposits and bonds, rent from rented properties.

If you are a scientist or researcher, scientific knowledge is also an asset and here patents and copyright are inserted. The latter correspond to intangible assets as they are non-material assets.

The assets can also be properties, houses or land that are able to be converted into monetary means.

MAIN GROUPS OF ASSETS

Current assets are the company’s short-term assets, which create a flow in the company’s activities, carried out in the accounting period of less than one year. Examples include cash flows, inventories or accounts receivable.

Non-current assets are the accounts that record long-term assets and that remain in the company for different accounting years, for more than one year of activity. For example, movable assets, such as equipment or vehicles that the organization owns.

EXAMPLES OF ASSETS

There is a vast list of assets that, whether short or long term, tangible or intangible are means of generating money. There are also assets that allow you to generate earnings only once, such as the sale of a property, and others that allow it periodically, such as leasing, which generates income over time.

Here are some examples of assets:

  • Financial securities (such as stocks);
  • Properties;
  • Goods;
  • Copyright and patents;
  • Scientific or technological research;
  • Land;
  • Gold.
Assets and Liabilities

TYPES OF ASSESTS

There are basically four types of assets. 

  • Current, which refers to short-term revenues (stock, bank money); 
  • deferred, which represents the capital invested to generate revenue (infrastructure);
  •  the permanent ones, which have not become capital (machinery) and the long-term assets (loans).

WHAT IS A LIABILITY?

Liabilities, together with equity, correspond to the right side of the balance sheet and represent the company’s sources of financing, that is, the amounts that financed the asset. The same is true for natural persons. Have you taken out a loan to buy your home? So there is a debt to the bank, which for you represents an obligation, a cost. Credit card installments, water and electricity bills or taxes are another example of what our liabilities can be.

MAIN GROUPS OF LIABILITIES

Current liabilities are the obligations that the company has in the short term, recorded and paid in less than 12 months, and that have a flow within this period. For example, debts with suppliers, which are constant liabilities in records and payments.

Non-current liabilities are the records of long-term obligations that the company has that take longer to be paid, such as loans that are paid to banks for more than one year.

WHAT IS CURRENT LIQUIDITY?

A company’s current liquidity indicates its ability to pay its debt in the short term. That is, debts recorded as current liabilities. For that, it will be necessary to consider which assets are available so that the company can settle these debts, making the following division:

Current liquidity = Current assets / Current liabilities

If the result is greater than 1, it means that the company has enough assets to pay current debts. A result of less than 1 indicates that this company does not have the necessary funds to settle debts in the short term.

EXAMPLES OF LIABILITIES

  • Loan interest;
  • Accounts payable such as water, electricity and debts to suppliers or the State;
  • Taxes;
  • Mortgage;
  • Car for own travel;
  • House for own housing.

TYPES OF LIABILITIES

Liabilities can also be divided into four groups: unsecured liabilities, which indicate the outstanding balance in situations where liabilities are greater than assets; the current, which represents what will be paid soon (salaries and loans); the fictitious, which represents the accounts that have already been paid and, therefore, no longer enter the balance sheet; and the non-chargeable, which are the amounts that the company has no obligation to pay (bonus for employees, for example).

DIFFERENCES BETWEEN ASSETS AND LIABILITIES

This differentiation is essential to be able to understand and control your finances well. As assets generate profits and liabilities generate expenses. The assets are related to the means of income and which bring benefits, liabilities are money out of the expenses and expenses that the company had to make.

The difference in the total value of the assets and liabilities of a company is the equity. This indicates the position regarding their activities, investments and values ​​that the shareholders or partners have in a business. Assets and liabilities are recorded in accounting accounts, which mark and divide the different types of economic or financial flows of the organization. For example, when the company receives a sum of money, the accounting entry is made in an account called Cash and Cash Equivalents. Accounting accounts are part of a chart of accounts, an accounting system that organizes accounts by different types, in order to assist the administration of the company. There is also an obligation to show the government the financial position that the organization has.

Assets and Liabilities

CONCLUSION

The analysis of assets and liabilities is usually made using the ALM (Asset Liability Management) model. This method focuses on analyzing liabilities based on their costs, assessing risks and identifying possibilities for improvement.  so, it is always important  to have the help of professionals who can assist in the management of assets and liabilities, seeking, precisely, the balance between both.