Difference Between Similar Terms and Objects

Differences Between Assets and Liabilities

In the business world and accounting, these two terms are used often.

Assets refer to the items such as property, which the organization has legal ownership to. These items can be valued, and can be used to meet any financial obligation such as debts, commitments and the legacies.

Liabilities on the other hand are the obligations an individual has and should be met in a predetermined time in the future.

To summarizes it all, an asset is that which a company legally owns, while liabilities are the items, amounts or commodities the company owes.

The two are of equal importance to businesses as they can determine the overall financial position of a company with the help of several tools such as the balance sheet.

Both Assets and Liabilities form the fundamental accounting equation:

Assets = Liabilities + Equity

What is Assets?

An asset is accounting is any item that a company has purchased to increase its value and improve the income. It could also be used to improve the company’s operations. The assets are recorded in a company’s balance sheet and can be classified twice; either tangible or intangible; current or fixed.

Tangible assets are those which can be seen or touched by the human eye. You will find tangible assets under plant, equipment or property categories in the balance sheet of a company.

Intangible assets are those which can’t be touched and are non-physical in nature. They include features such as brand-names, domain names, software or even computer databases. These assets are believed to bring in more company value than the tangible which are subject to depreciation. The IAS 38 rules requires the intangible assets to be listed separately on a balance sheet and should be controlled by the company related to them.

Current assets are the items a company owns and consume or are converted to cash in a period of one year.  Examples of such include trade debtors, cash at bank or in hand, prepayments. Fixed assets on the other hand are that which a business owns but will be used by the company for a minimum of a year without conversion into cash. Good examples of fixed assets are land, buildings, fixtures and motor vehicles.

 

What is Liabilities?

A liability is a form of debt which is owed by a company to an external entity such as a financial institution, suppliers. This debt requires the company to give up some form of economic benefit to cover the owed amount. Liabilities can be classified into accounts payable, and are usually credited in the accounting double entry bookkeeping tool.

In order to sell a liability, the business is forced to sell a certain economic benefit. These economic benefits could include cash, other assets or accomplishment of a service. A current ratio is an analysis tool that determines whether a company is able to pay off their current liabilities with ease. Examples of current liabilities include debt, payables, overdrafts and short bills.

Liabilities are listed as credits on the balance sheets and are listed in terms of payment terms either current or long term. The current liabilities are all that are required to be paid in a year. All liabilities with longer payment terms are classified as long-term. The long term liabilities include loans, tax obligations, debentures, and the pension payments.

 

Differences Between Assets and Liabilities

The pointers below give a deeper insight of the differences between an asset and a liabilities:

Definition of Assets and Liabilities

Assets are items such as property, buildings which an organization

own and that can be transformed to cash. On the other hand, liabilities are the deb amounts that are to owed by the company to be settled within a future date.

What is It?

Assets are financial resources that will bring some economic benefit to the organization that owns them. Financial obligations that a company has to meet within a set time.

Value in Assets and Liabilities

Assets are resources that depreciate with time. This is especially within the current assets that are used regularly. The depreciation amount is then tabulated and reduced from the initial value assumption. Liabilities however, don’t depreciate.

Position in The Balance Sheet

Assets are located on the right side of a balance sheet. Liabilities are listed in order of time obligation on the left side of the balance sheet.

Classification of Assets and Liabilities

Assets on the balance sheet are categorized as current assets and fixed assets. The liabilities are categorized as current liabilities and long-term liabilities.

Calculation of Assets and Liabilities

Both the assets and liabilities have different formulas to derive the amount Assets formula is Assets = Liabilities + Equity, and the liabilities formula is liabilities = assets – equity.

Assets vs. Liabilities: Comparison Chart

Summary of Assets vs. Liabilities

  • Assets are the purchases an organization makes to improve their financial position or assist in their operations. Liabilities are the amounts a company owes to external entities.
  • Assets and liabilities are both taken into consideration to reflect the true financial position of a company.
  • The assets of a company are also used to determine the credit scores of a company among other factors.
  • Comparisons within different firms can also be done accurately with the balance sheet that displays both the assets and liabilities.
  • Assets include land, buildings, plant and machinery, inventory and can all easily depreciate in value. Liabilities include loans, debentures, accounts payables and can’t depreciate.

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References :


[0]Weert, F. de. (2011). Bank and Insurance Capital Management. John Wiley & Sons.

[1]Choudhry, M. (2011). Bank Asset and Liability Management: Strategy, Trading, Analysis. John Wiley & Sons.

[2]Chorafas, D. N. (2002). Liabilities, Liquidity, and Cash Management: Balancing Financial Risks. John Wiley & Sons.

[3]Image credit: https://www.flickr.com/photos/sampjb/7690679256

[4]Image credit: https://upload.wikimedia.org/wikipedia/commons/3/32/Schedule_1.png

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