The three main elements of a company ‘s financial structure- assets, capital, and liabilities – show essential knowledge about its financial position.
Assets refer to anything that has economic value;
capital is known as the funds or resources used for investment and growth;
and liabilities are the debts or obligations owed by a company.
Together, these elements help maintain the balance, stability, and capacity necessary for a business to operate properly.
Assets
An asset is a source of monetary value owned or controlled by a person, business, or country , believed to have the potential to provide benefits in the short term.
An asset is an item included on a balance sheet; it is purchased or developed to increase the worth or functionality of the entity possessing it .
The easiest way to understand an asset is as something that will eventually produce an inflow of cash, decrease expenses , or increase sales. Examples include manufacturing machinery , designs , or patents
Types of Assets
Assets are among the main elements reported on a balance sheet.
They have been categorized into four broad categories: current or short-term assets, fixed assets, financial assets, and intangible assets.
Current Assets
Current assets consist of those economic resources known to be available or consumed within one year and currently exist in the form of cash or equivalent . Generally, cash and cash equivalents, accounts receivable, inventory, and other prepaid expenses fall into this category.
Fixed Assets
Fixed assets are resources expected to last over a year. Examples include plants, equipment, and buildings. An accounting adjustment known as depreciation is applied to fixed assets over time , allowing for the allocation of an asset ‘s cost across its useful life . Generally, depreciation may or may not reflect the loss of earning capacity of that fixed asset.
Financial Assets
Financial assets include equities such as stocks, bonds issued by both corporate entities and governmental organizations, and other forms of securities. They are relatively liquid and have value based on their current market price, as opposed to fixed assets.
Intangible Assets
Intangible assets are economic assets that cannot take physical forms.
Similar to fixed assets, intangible assets can be amortized by spreading their costs over their useful lives for both accounting and tax purposes.
Capital
The general term ” capital ” refers to anything of value or utility to its owners;
for example, a factory and all its equipment, intellectual property in the form of patents, or any financial asset in a business or personal account.
While money itself could be considered capital, it is less tautologically linked to working or operational cash used to generate more money through investment or productive activity.
Generally, capital forms the financial lifeline of every business , both in operation and in funding its future progress.
Types of Capital
Capital for businesses can be generated from business operations or attracted through debt or equity financing.
When preparing the budget for most types of businesses, it includes working capital, equity capital, and debt capital .
Debt Capital
A firm can obtain capital through debt. This means that the firm is obligated to repay the borrowed funds and borrows from private or government sources.
Established firms usually borrow from banks and other financial institutions or sell bonds.
Small business owners operating on a shoestring budget may turn to friends and family, online lenders, credit card companies, and loan programs from the federal government.
Equity Capital
Equity capital can take different forms .
Traditionally, a distinction is made among private equity, public equity, and real estate equity. Private and public equity are typically organized as stocks of a company.
The only difference here is that public equity is raised through the listing of a company’s stock on a stock exchange , while private equity is raised among a select group of investors.
Working Capital
Working capital refers to the liquid capital assets of a company that are available to meet its obligations for daily operations.
Working capital measures the short-term liquidity of a company.
More directly, it assesses how well a firm can pay its debts and accounts payable within the upcoming year .
Liability
A liability is something owed to a person or a company, primarily in a cash sum.
Liabilities are extinguished through a series of transfers over time of present rights to money, goods , or services.
Generally, such liabilities appear on the balance sheet on the right side and can include mortgages, accounts payable, loans, deferred revenues, bonds, warranties, and accrued expenses.
Essentially , liabilities are the counterpart of assets. They refer to the things you owe or have borrowed.
Assets, on the other hand, are items you own or that someone owes you.
Types of liabilities
- Current liabilities
Analysts want to see that an entity has the ability to pay short-term liabilities within one year using cash.
Short-term liabilities can include costs incurred in payroll and accounts payable, which may involve money owed to vendors, monthly utility costs, etc.
- Non-Current (Long Term) liabilities
Any liability that is not due and payable within less than one year falls under the definition of non-current liabilities that are due after 12 months.
Conclusion
Assets, capital, and liabilities briefly explain the financial structure of a firm.
Assets indicate what a company possesses;
capital signifies an entity’s investment potential;
and liabilities reflect a firm’s current and future obligations.
Understanding these elements helps analyze a firm’s financial position, make informed decisions, and ensure long-term stability.