What is an Asset?
Assets are resources owned by a business that helps in maintaining a stable financial condition or making profits into the future.
They represent something of value owned by the business, including tangible items, such as cash and property, and intangible items, such as patents and goodwill.
An understanding of and management of assets are necessary tools in financial planning and sustainable growth.
Assets can be classified considering its liquidity, physical natures and the roles those assets have undertaken in the business operation by either supporting operations, generating revenues, and adding value to the business.
Types of Assets
1) Current Assets
They are highly liquid and can be converted into cash within a year and hence offer immediate financial flexibility. Examples include:
Cash and Cash Equivalents: On-hand cash, short-term deposits, and short-term investments that can be easily used to pay for expenses.
Accounts receivable is the amount by which customers owe to the firm, which shows a cash inflow.
Inventory: Goods or materials that are on hand for the purpose of selling or production, a major resource in retail as well as manufacturing.
Prepaid Expenses – these consist of advance payments to individuals such as rent or insurance which benefits the business over time.
2) Fixed Assets (Noncurrent Assets)
Long-term assets, fixed assets are crucial to the activity of the business and represent long-term benefits, though these benefits will be reduced over time through depreciation. Examples include:
Property and Real Estate: Properties or grounds that are owned, used for work or operations.
Machinery and Equipment: Tools and machinery which are used to undertake production and other business operations.
Vehicles: These are firm-owned vehicles used primarily for logistics or business purposes.
Patents and Trademarks: Intangibles protecting intellectual property, adding value to a brand.
3) Tangible Assets
include all those assets that can be seen or touched. This makes them particularly secure because of their outright physical nature.
Tangible assets can also be classified as current, such as cash and inventory, and fixed assets, such as equipment. Examples include:
Cash: To satisfy both liquidity and transaction requirements.
Real Estate: Business-owned land or property.
Inventory : Products or materials, either manufactured or purchased, held for sale.
Machine: Production apparatus.
4) Intangible Assets
Nonspecific assets, intangibles have an economic value that enhances brands and revenues. Yet, they are hard to liquidate but very crucial for long-term success. Examples include:
Patent and trademarks are intellectual property that ascribes a firm with a competitive edge.
Brand reputation and good will: Value from customer loyalty and market recognition.
Licenses and Permits: A license and a permit to conduct the business.
5) Operating Assets
These are the ones running and operating in the process of business generation to revenue and productivity. A few of these are
Inventory: it’s needed both in the selling and production processes.
Machinery: It helps to provide for the routine running of the manufacturing process.
Licenses: Requirement to legally operate in specific business areas.
6) Non-Operating Assets
Those held but not used and, thus, not needed for the normal course of business that rather passively contribute to revenues. Examples are:
Vacant Land: land not in use at the time of its observation but potentially saleable or leasable.
Investment Properties: Those properties that are bought for generating passive returns.
Short-Term Investments: Cash and other liquid assets whose earnings are not generated from day-to-day business activities.
Characteristics of Assets
Representation of value: Most assets contribute to the long-run financial well-being and value.
Generation of income: Most assets generate income directly or indirectly help in generating revenues.
Reduction of cost: Some assets, such as equipment, reduce costs by improving efficiency.
Depreciation and amortization of assets: Physical and intangible assets suffer decline in value through time and are capitalized with recorded depreciation or amortization.
Balances Sheet Reporting: Balance sheets report assets, the total resources of the company.
Liquidity: Assets have different liquidities, which affect their utility toward fulfilling these financial needs, whether short-term or long-term.
What is a liability?
A liability in accounting represents that kind of financial obligation a company or a person owes to another party.
It is an obligation to pay for a debt or service in the future and can be made up of money, goods, or services. Liabilities are essentially based on past transactions such as borrowing money, purchasing on credit, or having expenses that must be paid.
All these obligations are found in the balance sheet and may thus affect the overall health of a firm’s finances.
Types of Liabilities
1) Current Liabilities
Also known as short-term liabilities, are debts that fall due to be paid within one year.
To function on a daily basis, these liabilities need to be paid in time so that there is liquidity in a business organization. Current Liabilities include:
Accounts Payable: Outstanding bills and invoices outstanding from suppliers on products or services delivered.
Bills Payable: Short-term debt with an agreed date for the payment.
Interest Payable: Accrued interest on a loan or credit.
Short-term loans: These are the debts that fall due within a year.
Accrued expenses: Those expenses incurred but not paid, such as salaries of employees.
Income taxes payable: The share of income taxes to be paid for this period to government authorities.
Bank overdrafts: That portion of the bank account where there is a negative balance.
2) Non-current Liabilities
Also known as long-term liabilities are those lasting more than one year, and they are planned for in long-term finance and investment.
They frequently offer the capital to purchase those assets that are typically long-term in nature, such as property, plants, and equipment, or to finance substantial projects.
Long-term liabilities are also an essential component of a company’s analysis regarding its solvency in that they divulge the degree of its ability to carry on extended financial liabilities. Examples include:
Bonds Payable : Debt securities that a company issues in order to raise capital for debt repayment over several years.
Capital Leases: rental agreements, especially equipment or property, secured for long periods.
Mortgage Payable: Loans secured using property. Such loans require a long period of repayment.
Deferred Tax Liabilities: Tax obligations that are being postponed for payment in the future.
Long-term Notes Payable: Promissory notes whose maturities are more than one year.
3) Contingent liabilities
are potential obligations which depend on the occurrence of future events.
Contingent liabilities occur as a result of lawsuits, warranties, and other such eventualities where a company may be pressured to pay if certain conditions are met.
In general, contingent liabilities are presented in the financial statements unless the probability of happening is considered to be high because they can influence future profitability and cash inflow.
Contingent liabilities do not always occur and the amount estimated is also unpredictable.
Characteristics of Liabilities
Short- and Long-term Nature: Liabilities may be due within one year (short-term) or more than one year (long-term), which would affect the company’s liquidity and solvency.
Accrued by Future Transactions: Liabilities require a company to sacrifice future economic benefits, usually through asset transfer, payment, or services.
Obligations arising from past events: Liabilities are obligations of past events or transactions which have resulted in a present obligation to pay.
Not Always Legally Enforceable: While some liabilities could be legally unsustainable, they are still considered to be ethical or constructive obligations.