What are assets and liabilities examples?

Examples of liabilities and assets - Everything your company possesses is an asset, including cash, equipment, inventory, and investments. What your company owes others is referred to as its liabilities, for example, loans, mortgages, etc.

What is the difference between assets and liabilities?

Your company's assets are the goods it owns that can generate future economic advantage. Liabilities are amounts owed to third parties. In a nutshell, assets put money in your pocket, while liabilities take money out!

What are current liabilities?

Accounts payable, payroll due, payroll taxes, accumulated expenses, income taxes, short-term notes payable, interest payable, accrued interest, utilities, rental fees, and other short-term loans are examples of current liabilities that appear on the balance sheet.

How do I determine whether something is a liability?

A liability is something borrowed from, owed to, or obligated to another person. It can be genuine (for example, a bill that needs to be paid) or hypothetical (e.g., a possible lawsuit). Liability is not always a bad thing. For example, a company may incur debt in order to expand and grow its operations. Alternatively, a person may obtain a mortgage to acquire a home.

How Do Current Liabilities Differ From Long-Term Liabilities?

Companies will categorize their liabilities based on when they are due. Current liabilities are due in a year and are frequently paid for with current assets. Noncurrent liabilities are those that are due in more than a year and typically involve debt repayments and delayed payments.

Assets and Liabilities

Assets and liabilities tend to play a vital role in ensuring the profitability of a business or its long-term viability. It depends on how well a company can manage them effectively.

Assets are what a company owns, and liabilities are what the company owes. Both assets and liabilities are reflected in the balance sheet of a company, depicting its financial health and soundness.

The difference between the assets and liabilities of a company determines its Equity.

What are Assets and Liabilities?

Here is a detailed explanation of assets and liabilities meaning-

Assets

The term ‘asset’ signifies all kinds of resources that help generate revenue as well as receivables. Assets may generate robust cash flow as they help convert raw materials or can be converted into cash or cash equivalents.

Notably, such resources are reported on the left side of the Balance Sheet that is maintained by any entity involved in commercial practice.

Generally, the sum of total liabilities and equities owned helps compute the value of assets. Consequently, it can be said -

Total Assets = Liabilities (Accounts Payable) + Owner’s Equity

Liabilities

The term liability signifies all types of account payables. It can further be defined as a financial obligation that individuals must meet.

Usually, liabilities tend to play a significant role when it comes to financing expansion or ensuring the smooth processing of everyday operations of commercial practices.

The obligations of a commercial entity are reported on the right side of the Balance Sheet.

Total Liabilities = Assets (Accounts Receivable) - Owner’s Equity

Different Types of Assets and Liabilities

The following offers a detailed explanation of the different types of assets and liabilities.

Types of Assets

Most assets are classified based on 3 broad categories, namely -

Convertibility	Depending on their extent of convertibility, they are further divided into fixed assets or current assets.
Physical existence	Comprise assets that are both tangible and intangible.
Purpose	Depending on their purpose of use, they are categorised as operating and non-operating assets.

Following are the 6 different types of assets-

Current Assets or Short-term Assets

Current assets are the types of assets that can be readily converted into cash or its equivalent resources typically within a year and are known as liquid assets. For example, cash equivalents, stock, marketable securities and short-term deposits are some of the most common current assets.

Fixed Assets or Long-term Assets

Also known as hard assets and fixed assets, these resources are not easy to convert into cash or its equivalent kind. Generally, land, machinery, equipment, building, patents, trademarks, etc. are considered as fixed assets.

Tangible Assets

Assets with a physical existence are categorised as tangible assets. Resources like stock, land, building, office supplies, equipment, machinery and marketable securities, among others are functioning examples of tangible assets.

Intangible Assets

On the contrary, assets which do not possess a physical existence come under the category of intangible assets. The best examples of such assets would be market goodwill, corporate intellectual property, patents, copyrights, permits, trade secrets, brand, etc.

Operating Assets

Assets like cash, building, machinery, equipment, copyright, goodwill, stock, etc. are termed as operating assets. Typically, such assets are used to generate revenue and to maintain daily operation.

Non-operating Assets

Though these assets are not used for performing daily operations, they tend to help generate significant revenue. Some of the best examples of non-operating assets are short-term investments, vacant land, income generated through fixed deposits, etc.

Types of Liability

In a commercial setup, liabilities can be divided into 2 broad categories of internal and external liability.

Internal Liability	Comprises obligations like capital, accumulated profits and salaries, among others.
External Liability	Includes payables like taxes, overdrafts, creditors and borrowings.

Further, liabilities are divided into more separate categories as per their function, namely –

Current Liabilities

Non-current Liabilities

Contingent Liabilities

Relationship between Assets and Liabilities through Financial Ratios

Typically, fine-tuning the proportion of total assets and liabilities is a necessity for maintaining a company’s profitability.

It helps to analyze the company’s ability to manage its external and internal liabilities as well as how readily it can convert assets into cash equivalent. It also help figure out the liquidity ratio of a particular business venture.

Here are the list of financial ratios along with their formula that one must know.

Financial Ratios	Description	Formula
Current Ratio	With the help of current ratio, one can successfully figure out a company’s ability to pay off existing debt.	Current ratio = Current assets/ current liabilities
Acid Test Ratio	Acid-test ratio is used to gauge a company’s ability to repay short-term liabilities with the help of quick assets.	Acid-test ratio = Current assets – Inventories / Current liabilities
Cash Ratio	Cash ratio helps decipher a company’s ability to pay off short-term liabilities with the help of cash and cash equivalents.	Cash ratio = Cash and Cash equivalent / Current liabilities
Debt Ratio	Debt ratio is often a potent way of calculating the total’s assets of a company which was funded by debt.	Debt Ratio = Total Liabilities / Total Assets
Owner’s Equity	Assets and liabilities play a pivotal role when it comes to computing the value of existing capital or owner’s equity.	Owner’s equity = Total assets – Total liabilities

Difference Between Assets and Liabilities

Understand the assets and liabilities difference with the table mentioned below-

Assets	Liabilities
Assets contribute positively to a valuation of a company	Liabilities contribute negatively to a valuation of a company
It leads to cash inflow in the company	It leads to cash outflow in the company
It is a financial resource	It is a financial obligation
It generates revenue for the company	It is an expense for the company