Exploring Assets and Liabilities

Learn how to optimise financial decisions by balancing liabilities against assets, ensuring sustainable wealth growth and stability.
Exploring Assets and Liabilities
3 mins read
30 March 2024

In our growing economy, financial stability is a vital aspect of prosperity. The first step towards gaining financial stability is understanding the basics of finance. One such concept is understanding what are assets and liabilities. In the below article, we will get an in-depth guide about assets, liabilities and their types.

What are assets?

Assets have different meanings in different concepts, depending upon the terms where you use them. In finance, assets are resources that have financial value for an individual, company or country. For example, in accounting, owned office property is an asset of a company. In emotional terms, a hard-working employee is considered an asset for the company even though the employee is on salary.

The things that you own or the investments that you have made are your assets. Below are some of the assets that you must be aware of:

  • Cash
  • Investments
  • Patents
  • Property
  • Receivables
  • Stocks

The assets are categorised into different types depending on their physical presence, usage and value.

Different types of assets with examples

  1. Current assets:
    You might have seen the word current assets mentioned in balance sheets. These assets are equivalent to cash and can be easily converted into cash through sales or liquidation within a year. Current assets include cash, inventory, account receivables, cash equivalents and short-term investments. These assets are essential for business, as they can be easily converted into cash, to support ongoing business operations. These can be used for paying bills and expenses of day-to-day activities.
  2. Non-current assets:
    It takes time to convert non-current assets into cash. These are long-term investments such as land and machinery. These assets are revalued by considering amortisation and depreciation. For example, Machinery loses its value every year due to constant usage. Due to this, it is necessary to consider the depreciation of the machinery every year. Land, long-term investments, Patents, manufacturing plants, and machinery are Non-current assets.

Current assets and noncurrent assets are also further classified into tangible and intangible assets.

Tangible assets - The assets that are visible to your eyes, such as lands, machines, cash and stocks are known as tangible assets. These assets have financial value but have no physical presence.

Non-tangible assets - The assets that have financial value but no physical presence are classified into intangible assets. Some examples of intangible assets are patents, goodwill, trademarks and brands.

The most commonly used forms of investment by the majority of people are mutual funds and fixed deposits. Bajaj Finserv Platform offers a range of options for Fixed deposits and mutual funds. You can select from the available choices based on your specific requirements. To determine the value of your assets you also need to consider your liabilities. The balance between assets and liabilities determines the financial condition of your company. Let’s understand more about liabilities.

What is liability?

Liability is when you owe something to someone. In financial terms, the debts that you owe are your liabilities. For example, If you buy a house and take a home loan, the house is your property and asset, while the loan you need to pay is your liability. Some forms of liabilities are loans, mortgages, bonds, deferred payments and accounts payable.

Different types of liabilities with examples

  1. Current liabilities:
    Loans that need to be repaid, within a year are known as current liabilities. These debts are settled using the revenue generated from the day-to-day operations of your company. Current liabilities are short-term loans, accrued expenses, tax payable, payroll, dividends and accounts payable. Some liabilities examples are overdrafts from banks for boosting capital, employee benefit plans such as medical claims and advances received before delivery of a product or service are considered current liability.
  2. Non-current liabilities:
    Liabilities that are not due within a year are non-current liabilities. You don’t have to pay these liabilities within a year. These liabilities are assessed every year in the balance sheet. Long-term investors look into the non-current liabilities of a company to understand its financial condition. Some non-current liabilities are long-term borrowings, leases, bonds payable, secured and unsecured loans and deferred tax liabilities. Liabilities examples are paying a long-term lease for your manufacturing unit. It is a non-current liability.
  3. Contingent liabilities:
    Contingent liabilities are the potential liabilities that may arise in future as lawsuits or product warranties. Contingent liabilities are recorded in the balance sheet to ensure the financial reports are accurate. It is considered a generally accepted accounting principle. For example, the company cannot plan for the products that will get replaced under warranty. They have no prior knowledge about the number of products that will be replaced or returned. This type of unexpected outcome is counted under contingent liabilities.

Conclusion

Assets and liabilities are important for the financial stability of the company. The rules that apply to business may not be completely suitable for you as an individual. Seeking professional advice before making investments and taking loans is very important as it plays a crucial role in balancing your assets and liabilities.

Frequently asked questions

What are assets and liabilities?

Assets are resources owned by the company with financial value that will give future benefits. Debts owed to other parties are known as liabilities.

Should assets be higher than liabilities?

Assets boost your company’s worth, while liabilities are debts on your company. If your assets are more than your debts, we can say that your business is financially stable.

What is the difference between current assets and noncurrent assets?

Current assets are assets that you can convert into cash within a year are short-term investments, while non-current assets cannot be converted into cash on an immediate basis. Current assets are utilised in the day-to-day operations of the company while non-current assets are long-term investments and the value can be determined only after one year.

What is the difference between assets and liabilities?

Assets are beneficial for the business as it generates cash flow for the company while liabilities are obligations that cause an outflow of cash from the company.

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