The terms assets and liabilities are two of the most important terms used in the world of accounting and finance. Although to a layman both the terms will seem to be the same, in reality, it is not so at all.
When you talk about an asset, it basically refers to the monetary or economic value of properties or items that are owned by a company or enterprise. Just like any good thing in life, the value of assets also depreciates every year.
On the other hand, the term liability refers to all the debts and obligations of a company or enterprise that are denoted in monetary or economic values.
Assets vs Liabilities
The difference between Assets and Liabilities is that any property owned by a company that has monetary value is known as an asset. Liability means any debt which a company owes to a person or an organization. Assets are depreciated from time to time, but liabilities are not depreciated.
- Assets: Accounts Receivable, Machinery, Cash, Furniture.
- Liability: Accounts Payable, Bank Overdraft, Outstanding Expenses.
Contrary to assets, the liabilities are non-depreciable. Thus, the basic difference between assets and liabilities is that the former is depreciable and the latter is non-depreciable in nature.
Comparison Table Between Assets and Liabilities
|Parameter of Comparison||Assets||Liabilities|
|Definition||Tangible or intangible things owned by an enterprise, which can be used to produce any positive monetary value is called an asset.||Any future obligations of some monetary benefits that one company or enterprise is bound to make to another, due to some past events or transactions are known as a liability.|
|Future Value||Has a tendency of depreciating annually.||It is of a non-depreciable nature.|
|Classified As||Fixed Assets, Current Assets, Wasting Assets, Liquid Assets, Intangible Assets, Fictitious Assets.||Long-term Liabilities, Fixed Liabilities, Contingent Liabilities, and Current Liabilities.|
|Calculated As||Capital + Liabilities||Assets – Capital|
What are Assets?
In the world of financial accounting, anything that is owned by an enterprise or a business is known as an asset. To make it more elaborate, an asset is anything intangible or tangible owned by a company and that can easily be used to produce some economic value.
You may even say that assets tell you about the total value of ownership that can easily be converted into money.
Basically, assets are broadly classified as intangible assets and tangible assets. The former are nonphysical resources and the latter are physical resources or resources that be touched. Tangible assets can even be further classified into fixed and current assets.
An example of fixed assets include buildings and an example of current assets include various inventories. When you talk about intangible assets, these basically include copyrights, patents, and goodwill.
Some of the examples of assets that you will find in a company balance sheet include goodwill, buildings, land, supplies, accounts receivable, petty cash, equipment, land improvements, prepaid insurance, inventory, temporary investments, and cash.
What are Liabilities?
Just like there is a good side to life, there is also a bad side to balance everything. Keeping this in mind, you will find a list of liabilities right opposite to the list of assets in a balance sheet.
When you talk about liabilities, these are basically all the obligations of an enterprise. These are mostly amounts owed by a company to its creditors for a past transaction.
Similar to assets, liabilities can also be classified into different categories. These include current liabilities, fixed liabilities, contingent liabilities, and long-term liabilities.
An example of a long-term liability includes bank loans. Fixed liabilities include proprietor’s capital, contingent liabilities include bill discounted, lawsuits, and pending investigations.
On the other hand, current liabilities include creditors, trade payables, and outstanding expenses.
Some of the examples of items that are found in the liabilities section of a balance sheet include bonds payable, lawsuits payable, customer deposits, other accrued expenses payable, wages payable, accounts payable, unearned revenues, warranty liability, income taxes payable, interest payable, salaries payable, and notes payable.
Main Differences Between Assets and Liabilities
- Whatever resources are controlled by a company, which can be utilized for any future economic uses or advantages, are known as assets. It is basically a result of any past transaction or event. On the other hand, liabilities are obligations of a company that the company is bound to pay off in the days to come. These are also due to some past transactions and basically prove to be future expenses for an enterprise.
- Just like the life of anything good decreases with time, the values of assets also depreciate on an annual basis. However, in terms of liabilities, no such depreciation takes place.
- In the world of financial accounting, assets get debited if there is an increase. Whereas, liabilities tend to get credited if there is an increase in their amount. The opposite would happen if there is a decrease. For example, assets will get credited and liabilities will be debited.
- Different classifications of assets include fixed assets, intangible assets, liquid assets, current, assets, and fictitious assets. On the other hand, liabilities are classified as long-term liabilities, current liabilities, fixed liabilities, and contingent liabilities.
- Assets are considered as good from a business point of view since it generates an inflow of cash over the coming years. Whereas, liabilities, give rise to an outflow of cash over the coming years, due to which it is considered bad from a business point of view.
- While making the balance sheet, all the assets are placed first and once all the assets are computed, the liabilities are placed.
You may say that assets and liabilities are two sides of the same coin known as financial accounting. No business can continue to survive without the creation of assets.
At the same time, if a business fails to take any liabilities, it will not be able to grow in the days to come.
In order to succeed in the world of business, a company has to utilize its assets the right way and also opt for liabilities to increase its total tally of assets.
However, this is easier said than done. There are several uncontrollable factors that a business has to face, which may, sometimes, force a company to opt for liability as the last resort.
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