In the business glossary, assets and liabilities play a crucial role in the survival and growth of the company. Not only in business but in our daily life, we encounter these terms in general, because they help us to determine the net worth of a person. While assets are something, which an individual or a company owns, whereas liabilities refers to the funds owed by the company. In banking and accounting too, these terms have a greater relevance, as the whole balance sheet of a bank or a company relies on it. So, let’s take a look at the article, to understand the difference between assets and liabilities.
Content: Assets Vs Liabilities
|Basis for Comparison||Assets||Liabilities|
|Meaning||Assets are the property or estate, which a company owns, having monetary value||Liabilities refers to the debts, which a company owes to a person or entity.|
|What is it?||These are financial resources which provide future economic benefit.||These are the financial obligations, which has to be paid off in future.|
|Calculation||Assets = Liabilities + Owner's Equity||Liabilities = Assets - Owner's Equity|
|Position in Balance Sheet||Right||Left|
|Types||Current Assets, Non-Current Assets.||Current Liabilities, Non-Current Liabilities.|
|Example||Building, Cash, Goodwill, Account Receivable, Investments etc.||Long term borrowings, Bank Overdraft, Account Payable etc.|
Definition of Assets
The economic value of anything which is owned by the company is known as Assets. In simple words, assets are those objects that can be converted into cash or generates income for the company shortly. It is helpful in paying out any debt or expense of the entity. Accounting divides assets into two broad categories which are-
- Tangible Fixed Assets
- Intangible Fixed Assets
- Long-term Investments
- Account Receivable
- Prepaid Expenses
Definition of Liabilities
The economic value of any debt or obligation owed by the company to any other individual or organisation is known as a liability. In simple words, the liabilities are the responsibilities arising out of past transactions, which has to be paid by the company shortly, through the assets owned by the entity. Accounting divides liabilities into two broad categories which are-
- Long Term Loans
- Short-term Loan
- Account Payable
- Bank Overdraft
- Outstanding expenses
Key Differences Between Assets and Liabilities
- In accounting context, assets are the property or estate which can be transformed into cash in the future, whereas liabilities are the debt which is to be settled in the future.
- Assets refer to the financial resources, which provide future economic benefit. Conversely, liabilities are those financial obligations, which requires being paid off in the near future.
- Assets are depreciable objects, i.e. every year a certain percentage or amount is deducted as depreciation. As against this, liabilities are non-depreciable.
- In the balance sheet, assets are shown on the right side, while liabilities are placed at the left. Further, the total of assets and total of liiabilities should tally.
- Assets are classified as current and non-current assets. On the other hand, Liabilities are classified as current and non-current liabilities.
- Examples of assets – Trade Receivables, Building, Inventory, Patent, Furniture, etc. and Example of liabilities- Trade Payable, Debentures, Bank Loan, Overdraft, etc.
In the Balance Sheet, both the assets and liabilities are taken into consideration, which reflects the company’s financial position. Sometimes, this balance sheet is helpful in comparing the financial position of a company/firm in two different years or even between two or more companies/firms.