Everything You Need To Know About Assets And Liabilities!

This article is dedicated to entrepreneurs, who are, of course, in the situation of needing to understand the balance of the company, and contains a simple definition of the notions of assets and liabilities, as they are understood by anyone.

I was once asked by a child who heard me talk to someone about assets and liabilities and what role they play in his life, this child asked me what liabilities are, and I sat for a while thinking about how to tell him to understand.

I told him as follows, assets are something that puts money in your pocket and liabilities are something that takes money out of your pocket!

Or if you want some definitions that are much harder to understand:

An asset is a resource controlled by a company as a result of past events and is expected to bring economic benefits to the company in the future.

A liability is a current obligation for a company arising from previous events, the settlement of which is expected to result in the waiver of such resources that incorporate economic benefits.

I know exactly what you are thinking now, as the first definition, the one I told the child is the easiest to understand.

In order to better understand and create an image of everything I have said so far, I think it is better to show you some examples.

As advice, it would be good if you read Robert Kiyosaki's book Rich Father, Poor Father !

Examples of assets: income, bonds, mutual funds, dividends, etc.

Examples of liabilities: rent, bank loans, absolutely everything that takes money out of your pocket.

For many people, the house is considered a liability because it takes money out of your pocket even if it is a necessity that we have been taught to have!

Active vs. Liabilities - Differences

Among the important differences between these two notions are the following:

Assets are depreciable on the business over a shorter or longer period of time, while liabilities denote short- or long-term business obligations. If these obligations are deliberately made for the acquisition of assets, then they confer business benefits.

Assets are debited when their value increases and are credited when their value decreases. In the case of liabilities, they are debited when they decrease and credited when they increase.

All fixed assets depreciate over time, ie they have a certain useful life and lose their value over the years. The only non-depreciating fixed asset is land.

Liabilities, on the other hand, cannot be depreciated, but are depreciated in the short or long term.

Assets generate business income, while liabilities involve cash outflows, because they are payable, but that does not mean that they fall into the category of costs.

Assets are bought in order to grow the business, and liabilities have more of a sustainability character, because through them more assets can be obtained that will lead to their payment in the future.

Assets vs. Liabilities

Assets add value to your company and increase your company's equity, while liabilities decrease your company's value and equity. The more your assets outweigh your liabilities, the stronger the financial health of your business. But if you find yourself with more liabilities than assets, you may be on the cusp of going out of business.

Examples of assets are :

- Cash

- Investments

- Inventory

- Office equipment

- Machinery

- Real estate

- Company-owned vehicles

Examples of liabilities are :

- Bank debt

- Mortgage debt

- Money owed to suppliers (accounts payable)

- Wages owed

- Taxes owed