Assets, liabilities and equity

Accountants use the words “assets , ” “liabilities,” and “equity” a lot . But what do these words really mean? And what do they have to do with companies? Below we will break down each term as simply as possible, and see how they relate to each other.

Active

The asset can be defined as all objects or property, tangible or intangible , which the company owns and which have economic value .

• Tangible assets are physical entities owned by the business, such as land, buildings, vehicles, equipment, and inventory.
• Intangible assets are things that represent money or value; things like Accounts Receivable, Patents, Contracts, and Certificates of Deposit (CDs).

Assets are also grouped according to their useful life or liquidity , the rate at which they can be converted to cash. Current assets are items that are consumed, sold, or fully converted to cash in 12 months or less. Examples of current assets include accounts receivable and prepaid expenses.

The fixed assets (non – current) are tangible assets with a useful life of at least one year and the generally longer. Fixed assets can include machinery, buildings, and vehicles. Fixed assets are generally not very liquid, and because of their higher costs, assets are not charged at expense, but are depreciated or “written off” over several years according to one of several depreciation schedules.

passive

The liabilities are debts or obligations of a company finance: the money the company owes to others. Liabilities are classified as current or long-term.

Current liabilities are debts that are paid in 12 months or less, and consist mainly of monthly operating debts. Examples of current liabilities may include accounts payable and customer deposits.

Current liabilities are generally paid with current assets; that is, the money in the company’s checking account. The working capital of a company is the difference between its current assets and liabilities. Managing short-term debt and having adequate working capital is vital to the long-term success of a business.

Long-term (non-current) liabilities are typically mortgages or loans used to buy or hold fixed assets, and are paid in years rather than months.

Net worth

The Net Equity is of utmost importance for the owner of each business or company, since it is the financial part of the company, the portion of the total assets of the company that the owner owns in its entirety. These assets can be as buildings and equipment, or in cash. Net worth is also known as equity.

For example, if you buy a $ 30,000 vehicle with a $ 25,000 loan and $ 5,000 cash, you have acquired a $ 30,000 asset, but you only have $ 5,000 of equity. The balance sheet equation is:

Assets = Liabilities + Owner’s equity

We can see how this equation works with our example: $ 30,000 Assets = $ 25,000 Liabilities + $ 5,000 Net Worth.

Here we have come to the end of our article on the parts of the balance sheet (assets, liabilities and equity). If you have any questions, leave us a comment below, we will respond as soon as possible and try to solve the problems.