Skip to content

BEAST INVESTOR

What are Assets and Liabilities? (Everything you need to know in 2022)

Assets and Liabilities

Assets and liabilities are the major components of a company.  And for you also.

When analyzing a company you’ll come up with one financial statement which is the balance sheet. The balance sheet is all about assets and liabilities.

Understanding the difference between assets and liabilities is what helps you analyze the health of a company.

It does not just help you understand companies’ health, but it also helps you to how should you approach assets and liabilities in your own life.

In this post, you’ll learn what are assets and liabilities? Examples and types of assets and liabilities, the difference between assets and liabilities (with infographic) and end up with frequently asked questions.

What are Assets?

Assets are anything that you own or a company owns. Assets are resources used to provide future economic benefits.

Assets are items that can be converted into cash. Assets put money in your pocket.

For example, Suppose you bought a property (real estate) of Rs 1 crore. You rent it out the property to the company for their day-to-day operations.

The rent of that property for a month is Rs 50,000. At the end of 5 years, you sold the property at Rs 1.5 crore to the same company you rented out.

The rent of the property created an inflow of money for you. Moreover, you sold the property at more than bought price.

Here also you make money, through capital appreciation. That’s how assets can provide you with economic benefits.

Examples of assets

There are numerous assets, but here are some assets that you should know:

  • Marketable securities
  • Trademarks
  • Product designs
  • Distribution rights
  • Mineral rights
  • Software
  • Computers
  • Furniture and fixtures
  • Accounts Receivable
  • Inventory
  • Investments
  • PPE (Property, Plant, and Equipment)
  • Vehicles
  • Patents (intangible asset)
  • Land & Buildings
  • Machinery
  • Cash at bank
  • Cash in hand
  • Debtors
  • Real Estate
  • Jewelry, Gold, Silver
  • Business
  • Something that can be bought/sold/traded for money
  • Insurance Policy

6 Types of Assets

types of assets

Assets are classified into 6 categories:

Current Assets

Current assets are assets that can be sold or converted into cash within a year. It is also called liquid assets.

Examples of Current assets are:

  • Cash in hand or bank
  • Marketable securities
  • Inventory
  • Account receivables

Non-current Assets

Non-current assets are assets that are not expected to be sold or converted into cash within a year. Also called fixed assets.

Examples of Non-current assets:

Tangible Assets

A tangible asset is an asset that you can see, feel and touch, and has a physical substance.

Examples of Tangible assets:

  • Real estate
  • Buildings
  • Precious metals
  • Inventory
  • Cash

Nontangibal Assets

Non-tangible are assets that don’t have physical substance. You can’t touch, see, and feel them.

Examples of Nontagibal assets:

Operating Assets

Operating assets are assets that are used to generate income and revenue for a business.

Examples of Operating assets:

  • Cash
  • Inventory
  • Building
  • Machinery
  • Equipment
  • Patents

Non operating Assets

Non-operating assets are not actively involved in business operations. However, it can still generate revenue.

Examples of Non-operating assets:

  • Short-term and long term investments
  • Marketable securities
  • Idle equipment
  • vacant land
  • loan receivables

What are Liabilities?

Liabilities are what you owe or obligation to repay someone.

For example, If you take a loan from a bank, the loan would be your liability.

Liability is somewhat better for business if used properly. Individuals who have more liabilities than assets can make them broke.

You should only go for the liabilities (debt) only when you need it, such as for a college education.

Don’t get liability for buying useless stuff such as iPhone.

In a nutshell, liabilities take money out of your pocket.

Examples of Liabilities

  • Account payable
  • Short-term debt
  • Income Tax
  • Wages
  • Long-term bonds
  • Long-term leases
  • Pensions obligation
  • Debenture
  • Cases pending in the court
  • product warranties
  • pending investigation
  • Interest payable

3 Types of Liabilities

types of liabilities

Liabilities are classified into 3 categories:

Current Liabilities

Current liabilities are liabilities that are expected to be settled within one year.

Examples of current liabilities:

  • Account payable
  • Short-term debt
  • Income Tax
  • Wages

Non-Current Liabilities

Non-current liabilities are long-term debt or loans not expected to be settled within a year. Also called long-term liabilities.

Examples of non-Current liabilities:

  • Long-term bonds
  • Long-term leases
  • Pensions obligation
  • Debenture

Contingent Liabilities

The Liability is not a liability today but can be a liability in the future. Contingent liabilities are uncertain liabilities. Also called doubtful liabilities.

Examples of Contingent liabilities:

  • Cases pending in the court
  • product warranties
  • pending investigation

What is the difference between Assets and liabilities?

difference between assets and liabilities

The main difference between assets and liabilities is: Assets put money in your pocket. Liabilities take money out of your pocket.

In assets you own. And in liabilities you owe.

Assets create an inflow of cash. On the other hand, liabilities create an outflow of cash. For example, when you buy a property, and rent it out, you can get rent on it if you lease. Rent is an inflow of cash. And when you took a loan, the EMI is your outflow of cash.

Assets increase your net worth. Liabilities decrease your net worth.

The difference between Assets and liabilities is a good indicator for a business. The more assets company has and the fewer liabilities indicate the good health of a company. It is also entitled to you.

FAQ

Is your house an asset or a liability?

Yes, a house is an asset. Because a house can convert into cash and can provide you economic benefit.

Is a car an asset or a liability?

Yes, it is an asset. It is categorized as depreciable assets. Your car prices lose value as you drive more.

However, if you purchased a car through a loan then the loan is your liability.

How do you turn a liability into an asset?

You can’t turn a liability into an asset. You can just reduce it.

Like a loan, you can’t make it an asset, but you can pay off and reduce it.

Conclusion

The major thing you can do to assets and liabilities is to focus more on acquiring assets and keep away from liabilities.

It does not mean liabilities are bad. Take liabilities only when you need them.

Spread the love

Join the conversation

Your email address will not be published.