Most areas of business accounting would be difficult to understand without first grasping the concepts of assets and liabilities. Essentially, all money going in and out of a business will fall into different “accounts.” Those accounts are classified as asset accounts, liability accounts, or equity accounts (such as owner’s equity or shareholder equity, basically meaning what’s invested into a business). Assets and liabilities are the most common classifications between accounts.
What are Assets?
An asset is anything a person or company actually owns that has some kind of future value. Something fluid like cash is an asset for a business, as are property, equipment, accounts receivable (money owed to the company), investments, and even intellectual property rights such as copyrights, trademarks, and patents.
Here’s an example when thinking of a wholesaler: Some of their assets would include their products, any money owed to them by retailers ordering in bulk but paying later, and their vehicles for transporting goods to buyers, assuming they do that independently.
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What are Liabilities?
On the other side of the spectrum, a company has liabilities, or things owed. Some examples of common liabilities include accounts payable (essentially cash owed from purchases made on credit or payment terms), or yearly payroll and building lease costs.
Using the same example of a wholesaler, the company’s liabilities would include things such as their yearly lease total for warehouse space and the yearly salaries of their employees and contractors.
How Assets and Liabilities are Related
Assets and liabilities are two sides of the financial spectrum for a business, and are vital in being able to balance a company’s financial records (in addition to owner’s equity). Understanding assets and liabilities can help a business owner to better gauge the financial health of their company, similar to the way an individual’s financial situation is determined by comparing what they have of value personally as opposed to what they owe to others.