Assets, liabilities and capital

In accounting and finance, an asset represents the assets and rights that an entity possesses to carry out an activity, from which it is expected to obtain a benefit or economic performance. This is the product of the sum between liabilities and capital.

The liability is the set of debts and obligations contracted by a company in the past and which it expects to be settled in the future, with the aim of carrying out an activity.

In the case of capital , this refers to financial resources , in money or goods, that come from the contribution of the partners or shareholders of an entity, in order to generate some value or performance.

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DefinitionAssets and rights that a company possesses, from which it is expected to obtain benefits.Debts and obligations that a company has incurred in order to carry out its activity.Financial resources contributed by partners or shareholders, in order to obtain benefits.
Characteristics
  • It is expected to generate future returns.
  • It has monetary value.
  • It is used to settle liabilities.
  • Represents an investment.
  • It implies an obligation that must be settled.
  • Finances company activities.
  • It comes from events that happened in the past.
  • It is key to producing goods and services.
  • It can be money, goods, services, or it can be intangible.
  • It can be public or private.
Types
  • Fixed asset.
  • Current assets.
  • Fixed liabilities.
  • Current liabilities.
  • Fixed capital.
  • Working capital.
Examples
  • Raw Materials.
  • Customer debts.
  • Cash.
  • Inventory.
  • Ground.
  • Patents
  • Mortgage loans.
  • Debts to pay.
  • Short term debts.
  • Acquisition of real estate.
  • Personal expenses.
  • Money for real estate.
  • Investment in bonds and stocks.
  • Partner investments.
  • High quality human resources.

What is an asset?

In general terms, an asset is an item that has the potential to generate some kind of profit for someone who owns and controls it.

In accounting, assets represent the assets and rights that a company or entity owns, and from which it is expected to obtain benefits. These assets can be valued in economic terms, so that, together, they can represent the value of a company, beyond the expected profits.

Assets are the result of the sum between capital and liabilities . In this way, money, property, investments and other tangible assets are part of the economic value of a company. In addition, also accounts payable, products for sale and other intangible assets, as they have the potential to generate more value.

Asset characteristics

  • They are expected to generate benefits (cash or otherwise).
  • They belong to the company and are under its control.
  • They have a value that can be translated in monetary terms.
  • They have a useful life (short or long term).
  • They represent what has been invested in.
  • They are used to settle liabilities or acquire more assets.
  • They are part of the balance sheet of a company.

Types of assets

Assets can be short or long-term, such as fixed or current assets, be tangible or intangible, and classified according to their use (operational or non-operational).

Fixed asset

Also called non-current assets, it is an asset that will not present movements for a period of at least one year.

Fixed assets represent those goods that the company owns that are not intended to be sold or traded. They have a low degree of liquidity and are used in the operations of the company. It is for this reason that its useful life must be long.

However, even if they are long-lived, fixed assets are susceptible to depreciation. This means that they lose value over time. Its purchase price is used as a basis in the accounting books, this being the value that can generally be amortized with its use.

Examples of fixed assets

  • Raw materials used in manufacturing.
  • Customer debts.
  • Used furniture (not for sale).
  • Patents
  • Ground.

Current assets

This type of asset represents those goods and rights that a company acquires and owns for a short period of time (less than 12 months). The goal is to market, sell, or consume them for cash.

This type of asset has a high degree of liquidity and is used in the daily activities of the company. This means that it should be possible to convert them to cash, relatively easily and in a short time, to meet operational expenses and other needs, before the end of a financial year.

Examples of current assets

  • Cash.
  • Short-term investments.
  • Advance payments made.
  • Inventory.
  • Payments receivable (short term).

Tangible and intangible fixed assets

The tangible fixed assets are physical tangible assets that have a long shelf life, whose value is relatively easy to measure and are used in the operating process of the company.

Its value is estimated with respect to the initial acquisition cost, the depreciation over time and the eventual amortization for its use.

Machinery, land, transportation vehicles, and personal property used for the operation of the business (office equipment) are tangible assets.

The intangible fixed assets are long – term assets that have no physical form. These assets have a long useful life and their value is relatively difficult to calculate.

Its assessment may depend on the perception of consumers or clients of a company, the brands it owns, or its ability to maintain a competitive quality level.

The useful life of these assets can have a specific or indefinite duration. The licenses or rights of a brand have a fixed term, while the very value of a brand and the professional skills that it represents are not easily determined. So sometimes they are amortizable, and other times what is analyzed is their deterioration.

Patents, copyrights, and trademarks are intangible assets.

Operating and non-operating assets

Operating assets are those that a company owns and uses in its operations. Cash, prepayments, and inventory are examples of operating current assets. The operations plant and the equipment used are operating fixed assets.

The non – operating assets are those that belong to the company but are not used in their operations everyday. Short-term investments, unused land, and interest on fixed deposits are examples of operating assets.

See also Difference between cost and expense.

What is a liability?

The liability represents the debts and obligations that a company has acquired in order to carry out its activity.

The payment of these obligations is made in money, in services or goods.

As with assets, liabilities can also be classified according to the time period into short-term liabilities (current or current) and long-term (fixed or non-current).

Liabilities characteristics

  • They involve an obligation that must be settled.
  • They are important to finance company activities.
  • They come from events that happened in the past.
  • They represent what is financed.
  • They require the assets for their liquidation.
  • They are part of the balance sheet of a company.

Types of liabilities

As with assets, liabilities can be short or long term, depending on the financial needs of the company. Particular cases such as potential obligations and expected obligations, which have not yet been satisfied, are also considered liabilities.

Fixed liabilities

It is also known as a non-current or long-term liability. These are the debts and obligations that must be settled in a period of 12 months, from the moment they have been contracted.

When there is a need to invest large amounts of money, a company may incur debt with an entity, to which it must pay the obligations that, generally, include interest. These obligations imply that the company has to handle a more complex payment plan at a financial level.

An obligation of this type is contracted for investment in large, long-term business projects, and thus be able to cope with the necessary finances. If a company is not able to pay off these debts, it can suffer from solvency problems.

Examples of long-term liabilities

  • Mortgage loans.
  • Bank loans.
  • Credit debts with other companies.
  • Acquisition of real estate.

Current liabilities

Also known as current liabilities, it comprises obligations due in a period of less than one year. It represents the way in which the company is financed in the short term in order to operate, generally through loans.

To meet these obligations, the liquidity of current assets is generally used to be able to pay these liabilities.

In the event that the debts cannot be paid using the assets, more loans can be requested, contracting more debt. This means that current liabilities can be used to settle obligations for other current liabilities.

Examples of current liabilities

  • Debts to pay.
  • Interest payable.
  • Short term debts.
  • Labor obligations and personnel expenses.

Deferred liabilities and contingent liabilities

The deferred tax liabilities relate to income collected in advance for a good or service that is not provided and there is no guarantee that cash will be made.

For example, when the owner of an apartment building receives advance payment for a rental, the service is only completed until the end of the lease period.

In the case of contingent liabilities , these refer to the possible obligations that a company could face in the future.

For example, in the event of a lawsuit, a company could be forced to pay some type of damage or loss, so the means of dealing with that possibility should be considered.

See also Fixed and variable costs

What is capital?

In economics or accounting, capital represents the financial resources (money or other good) that have been contributed by the partners or shareholders of an entity in order to generate value or obtain returns.

It is about money, resources or goods that make up the wealth of a company, as well as the goods, equipment and services owned by a company.

It is considered as a factor of production, together with the land, technology and work. As its general objective is the generation of value (economic or otherwise), capital is a basic element for the production of other goods or services (other values).

In addition, together with assets and liabilities, capital is part of the balance sheet of a company.

In general, individuals, companies, or other entities contribute capital in order to obtain some value or return in return. The yields produce dividends that are distributed to each of the elements that own the capital (equity).

However, profits are not always obtained at the end of an exercise, with loss of profits.

In the event that there are returns or profits at the end of a year, these can be converted back into capital, if they are invested in the company or in other businesses.

Expected capital gains can be presented in the form of investment interest, receivables, property, money, or other assets.

Capital characteristics

  • Key element to produce goods and services.
  • It can take various forms: money, goods, services or being intangible.
  • It can be private or public.
  • It is part of the balance sheet.

Types of capital

Capital can come from various sources or come in various forms. It can come in the form of money, goods and even as an intangible.

Fixed capital

It is the capital used in the long term, through several years, in the operations of a company. This capital is destined to the acquisition of machinery, buildings and implements of the production process, whose wear is gradual.

Working capital

It is the short-term capital that is constantly used and consumed, which is obtained from the difference between current assets and liabilities. It is a long-term fund (permanent capital) that finances day-to-day operating costs, also known as working funds.

Stockholders’ equity

It is the difference between assets and liabilities or equity that shareholders have in a company. It includes the capital stock and is part of the balance sheet.

Financial capital

It is the capital that represents the money invested by someone to obtain returns. The investment is made in stocks, savings, bonds and deposits, through different markets, national and international.

Capital social

It is the set of goods or money contributed by the partners or shareholders of a company. The partners have rights distributed through shares that represent the contribution of each one. In addition, it ensures that the company can cope with any situation of duties. If a company goes bankrupt, the capital stock can be used to settle the remaining obligations.

Human capital

The acquisition of workers and collaborators with extensive experience or high-level training, in areas relevant to the operational field of a company, can be considered as human capital. In addition, when a company has personnel training programs, job performance can increase, causing the company’s human capital to grow.

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