- Home
- Stock Market Guide
- Generic
- Assets And Liabilities
- Generic
- Assets And Liabilities
5paisa Research Team
Last Updated: 15 May, 2023 04:38 PM IST
Want to start your Investment Journey?
+91
Content
- What Are Assets And Liabilities?
- Assets
- Liabilities
- Different Types Of Assets And Liabilities
- Top Differences Between Assets and Liabilities
- Financial Ratios: The Relationship Between Assets and Liabilities
- Conclusion
Assets and liabilities are the most common accounting terms determining a business’s value. Every company, private or public, must maintain records of all the business transactions and create a balance sheet that details how many assets and liabilities a business has while operating.
The difference between assets and liabilities is the equity of the business. Every tangible or intangible receivable with monetary value is an asset, and every payable for the company is a liability. For example, when a company sells a product, they categorise the amount received as an asset in the balance sheet. In contrast, the company will add a payment made to a supplier to the liabilities section.
What Are Assets And Liabilities?
Every receivable for a business is an asset, whereas every payable or expense is a liability. Understanding the meaning of assets and liabilities is essential if you want to run or invest in a business based on the valuation.
Assets are of two types.
1. Fixed assets are long-term assets a business owns and uses to generate income over an extended period.
2. Current assets are short-term assets a company uses to fund its day-to-day operations.
Similarly, liabilities are also of two types.
1. Current liabilities are debts a business must pay within one year or less. These include accounts payable, short-term loans, taxes owed, and accrued expenses.
2. Long-term liabilities are debts a business must pay over a more extended period, usually longer than one year. Long-term liabilities include mortgages, long-term loans, bonds, and pension obligations.
Where Can Assets And Liabilities Be Found?
Let’s take a closer look at the two using a sample balance sheet to understand the assets and liabilities meaning.
(Insert a sample image of a balance sheet)
Assets
Assets are resources with economic value that a business owns or controls and are expected to provide future benefits. A company lists them on the left side of the balance sheet, a financial statement that reports its financial position at a specific time.
The formula for assets is–Total Assets = Liabilities (Accounts Payable) + Owner’s Equity.
Liabilities
Liabilities are financial obligations or debts that a company owes to others. They represent creditors' claims on the company's assets and can be either current or long-term. A company lists the liabilities on the right side of the balance sheet.
The formula for liabilities is–Total Liabilities = Assets (Accounts Receivable) - Owner’s Equity.
Different Types Of Assets And Liabilities
Assets and liabilities difference results in valuing a company and understanding whether it is an ideal investment match. It explains how the business is performing in terms of profit and loss. Listed below are the different types, along with assets and liabilities examples.
Types Of Assets
Most assets are classified based on three broad categories.
Convertibility | Divided into fixed assets and current assets. |
Physical Existence | Divided into tangible assets and intangible assets. |
Purpose | Divided into operating and non-operating assets. |
1. Current Assets or Short-term Assets: They are assets that a business expects to convert into cash or use up within one year or less. These are usually listed on the balance sheet in order of liquidity, meaning the ease with which a company can convert them into cash. Some examples are cash, accounts receivable, inventory, marketable securities, etc.
2. Fixed Assets or Long-term Assets: These are long-term assets that a business owns or uses to generate revenue without intent for sale. Companies typically hold these for a significant period and are difficult to convert into cash in the short term. Some examples are property, plant, machinery, long-term investments, etc.
3. Tangible Assets: These assets have a measurable value and can be seen, touched, and quantified. They represent physical resources that a business can use to generate revenue. Some examples of tangible assets include real estate, vehicles, equipment, inventory, and cash.
4. Intangible Assets: These assets do not have a physical form but a monetary value. These cannot be touched or seen but represent intellectual property, brand recognition, and goodwill. Some examples of intangible assets include patents, trademarks, copyrights, trade secrets, and customer lists.
5. Operating Assets: A business uses these assets to conduct its day-to-day operations and generate revenue. Operating assets include tangible and intangible assets. Some examples of operating assets are inventory, plant, machinery, intellectual property, goodwill, etc.
6. Non-operating assets: A business owns these assets but does not use them for day-to-day operations. However, they help generate significant revenue over time. These are typically held for investment purposes or as a one-time transaction. Some examples are real-estate, patents, trademarks, and marketable investments.
Different Types of Liabilities
Here is a table containing the different liability types in the assets and liabilities statement.
Internal Liability | Includes liabilities and obligations such as salaries, accumulated profits, capital, etc. |
External Liability | Includes liabilities and obligations such as borrowings, taxes, overdrafts, etc. |
Top Differences Between Assets and Liabilities
Here is a detailed table to understand the assets and liabilities difference.
Assets | Liabilities |
Assets contribute positively to a company’s valuation. | Liabilities contribute negatively to a company’s valuation. |
The formula: Liabilities (Accounts Payable) + Owner’s Equity. | The formula: Assets (Accounts Receivable) - Owner’s Equity. |
Assets generate cash inflow in the business. | Liabilities generate cash outflow in the business. |
Financial Ratios: The Relationship Between Assets and Liabilities
Financial ratios are quantitative measures individuals can use to analyse a company's financial performance and health. They compare different financial metrics and provide insights into the company's operations, such as profitability, liquidity, and solvency. Individuals can also use these financial ratios to analyse the assets and liabilities list and understand a company’s valuation. Here is the list of financial ratios with their formula.
Financial Ratios | Description | Formula |
Cash Ratio | A company's ability to pay off current short-term liabilities using cash and cash equivalent. | Cash Ratio: Cash and cash equivalent / Current liabilities. |
Acid Test Ratio | A company’s ability to cover short-term liabilities using quick assets. | Acid Test Ratio: Current assets - Inventories / Current liabilities. |
Current Ratio | A company’s ability to pay off debt. | Current Ratio: Current assets / Current liabilities. |
Owner’s Equity | Presents the difference between a company’s assets and liabilities. | Owner’s Equity: Total assets - Total liabilities. |
Debt Ratio | Calculates the total assets of a company funded by the company debt. | Debt Ratio: Total liabilities / Total assets. |
Financial ratios are important tools for investors, analysts, and management to evaluate a company's financial performance and make informed decisions about investment, lending, and other financial activities. By analysing financial ratios over time and comparing them to industry benchmarks, businesses can identify areas for improvement and make strategic decisions to improve their financial health and performance.
Conclusion
A list of assets and liabilities is critical for a business to showcase its financial health to investors. The relationship between assets and liabilities is vital because it helps determine a company's net worth or equity. The better a company’s assets are over its liabilities, the more customers and investors it can attract to increase revenue.
More About Generic
- Best Swing Trading Strategies
- What Is FD Laddering?
- What Credit Score is Needed to Buy a House?
- How to Deal with Job Loss?
- Is 750 a good credit score?
- Is 700 a Good Credit Score?
- What is Impulse Buying?
- Fico Score vs Credit Score
- How to remove late payments from your credit report?
- How to Read Your Credit Card Statement?
- Does Paying Car Insurance Build Credit?
- Cashback vs Reward Points
- 5 Common Credit Card Mistakes to Avoid
- Why Did My Credit Score Drop?
- How to Read a CIBIL Report
- How Long Does It Take to Improve Credit Score?
- Days Past Due (DPD) in CIBIL Report
- CIBIL Vs Experian Vs Equifax Vs Highmark Credit Score
- 11 Common Myths about CIBIL Score
- Tactical Asset Allocation
- What is a Certified Financial Advisor?
- What is Wealth Management?
- Capital Fund
- Reserve Fund
- Market Sentiment
- Endowment Fund
- Contingency Fund
- Registrar of Companies (RoC)
- Inventory Turnover Ratio
- Floating Rate Notes
- Base rate
- Asset-Backed Securities
- Acid-test Ratio
- Participating Preference Shares
- What is Expenses Tracking?
- What is Debt Consolidation?
- Credit Review
- Passive Investing
- How To Get Paperless Loans?
- How To Check CIBIL Defaulter List?
- Credit Score Vs CIBIL Score
- National Bank for Agriculture and Rural Development (NABARD)
- Statutory Liquidity Ratio (SLR)
- Cash Management Bill (CMB)
- Secured Overnight Financing Rate (SOFR)
- Personal Loan Vs Business Loan
- Personal Finance
- What is Credit Market?
- Trailing Stop Loss
- Gross NPA vs Net NPA
- Bank Rate vs Repo Rate
- Operating Margin
- Gearing Ratio
- G Secs - Government Securities in India
- Per Capita Income India
- What is Term Deposit
- Receivables Turnover Ratio
- Debtors Turnover Ratio
- Takeover
- IMPS Full Form in Banking
- Redemption of Debentures
- Rule of 72
- Institutional Investor
- Capital Expenditure and Revenue Expenditure
- What is Net Income
- Assets and Liabilities
- Gross Domestic Product (GDP)
- Non-Convertible Debentures
- Cost Inflation Index
- What Is Book Value?
- What Are High Net Worth Individuals?
- Types of Fixed Deposits
- What Is Net Profit?
- What is Neo Banking?
- Financial Shenanigans
- China Plus One Strategy
- What is Bank Compliance?
- What Is Gross Margin?
- What Is an Underwriter?
- What is Yield To Maturity (YTM)?
- What is Inflation?
- Types of Risk
- What Is the Difference Between Gross Profit and Net Profit?
- What is a Commercial Paper?
- NRE Account
- NRO Account
- Recurring Deposit (RD)
- What is Fair Market Value?
- What Is Fair Value?
- What is NRI?
- The CIBIL Score Explained
- Net Working Capital
- ROI - Return on Investment
- What Causes Inflation?
- What is Corporate Action?
- What is SEBI?
- Fund Flow Statement
- Interest Coverage Ratio
- Tangible Assets Vs. Intangible Assets
- Current Liabilities
- Current Ratio Explained - Examples, Analysis, and Calculations
- Restricted Stock Units (RSU)
- Liquidity Ratio
- Treasury Bills
- Capital Expenditure
- Non-Performing Assets (NPA)
- What is a UPI ID? Read More
Learn more
Stock / Share Market Demat Account Online Trading Mutual Funds Commodity Trading Basics IPO Trading Holiday Derivatives Trading Basics Tax Aadhaar Card Pan Card Savings Schemes International Markets Loans Banking Currency Bond and Debenture Insurance
Open Free Demat Account
Be a part of 5paisa community -The first listed discount broker of India.
+91
Frequently Asked Questions
What are assets and liabilities examples?
Some examples of assets are cash, cash equivalents, patents, trademarks, and machinery, while some examples of liabilities are debt, borrowings, taxes, and overdrafts.
What is the difference between assets and liabilities?
An asset is something a business owns which has monetary value and helps the business to generate revenue. On the other hand, liabilities are expenses and payables a company must pay outside the business.
What are current liabilities?
Current liabilities are obligations a business must pay within a short period, usually within a year or less. These are short-term debts or financial obligations to be settled using current assets such as cash, inventory, or accounts receivable.
How do I determine whether something is a liability?
Something is a liability if you owe, borrow from, or have to pay someone else using your business’s cash or cash equivalent.
How Do Current Liabilities Differ From Long-Term Liabilities?
Current liabilities are short-term obligations a business must repay within a year. On the other hand, the repayment obligation for long-term liabilities is over a year.
