Understanding examples of liabilities and assets and how they work is important for every individual or business. Assets and liabilities are what make up a person’s overall net worth.
Today, we’re diving deep into these terms to help you put yourself or your business on an encouraging financial path.
What are Assets and Liabilities?
Liabilities and assets are the main components of every business. These elements, along with equity, form a picture of a company’s financial standing.
This can also be applied to personal assets and liabilities, which work together to determine a person’s net worth.
Assets – Assets are everything you own. There are multiple types of assets, but the two main kinds are “current” and “fixed”. Current assets can be quickly converted into cash, while fixed assets are physical items that have financial value.
Liabilities – Liabilities are everything owed to other parties. This can be currently-owed money or fees that are paid back over time, such as a mortgage.
In short, assets put more money in your pocket while liabilities take it out.
In accounting, there is a simple formula that businesses use to calculate their overall equity (or net worth.) To find this amount, use this accounting equation:
Total Assets – Total Liabilities = Equity/Net Worth
The goal is for the equation to result in a positive number and the higher it is, the better. If the number is negative, this is a sign of financial trouble and action needs to be taken to flip the numbers.
What is the Difference Between Liabilities and Assets?
Aside from their inherent meaning, here are a few more differences that distinguish liabilities and assets:
- Depreciation – Assets are depreciable while liabilities are not.
- Increase in account – An increase in assets would be debited; however, an increase in liabilities would be credited.
- Decrease in account – A decrease in assets would be credited; however, a decrease in liabilities would be debited.
- Types – There are many types of assets, but only two types of liabilities (current and long-term.)
- Cash flow – Assets generate cash inflow while liabilities flush it out.
- Placement in a balance sheet – Assets are placed first in a balance sheet and liabilities are placed after the total assets.
Types of Assets and Liabilities
Here are a few common examples of liabilities and assets to help you understand them further:
- Equipment and furniture
- Computer hardware and software
- Lease agreements
- Property or land
- Trademarks, patents, franchises, or any other intellectual property
- Accounts payable
- Credit card debt
- Personal debt
- Home equity loans
- Automobile loans
- Sales and income tax
- Insurance and benefits payable
- Unearned revenue
- Lawsuits payable
- Student loans
Flickinger Sutterfield & Boulton Can Help
Understanding examples of liabilities and assets is the first step to building a case. Here at Flickinger Sutterfield & Boulton, we handle a wide variety of liability cases and are ready to give you the help you need. We would love to discuss the details of your case with you and determine the best course of action.
We have offices in Orem, Provo, Saratoga Springs, and West Jordan, Utah. Schedule your free consultation today!