Assets Vs Liabilities Top 9 Differences With Infographics

Differences Between Assets and Liabilities

Assets and liabilities are the main components of every business. Though these two elements are different, the purpose of both of them is to increase the lifespan of the business.

According to accounting standards, assets provide future benefits to the business. That’s why business consultants encourage businesses to build assets and reduce expenses. On the other hand, Liabilities are something that you’re obligated to pay off in the near or distant future. Liabilities are formed because you now receive a service/product to pay off later.

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In this article, we will go through a comparative analysis of both components and look at various aspects of them in length.

Assets vs. Liabilities Infographics

If you are new to accounting, you may have a look at this Basic Accounting TrainingBasic Accounting TrainingAccounting is the formal process through which a company attempts to present its financial information in a way that is both auditable and usable by the general public. read more (learn Accounting in less than 1 hour)

What are Assets?

Assets are something that keeps paying you for year/s. For example, let’s say that you have purchased an almirah for your business. It has a lifetime value of 5 years. That means purchasing the almirah allows you to get paid for the next five years from now.

Some assets offer you direct cash inflow, and some provide you in kind. In the almirah example, it gives you five years of convenience to keep and store relevant documents.

Now let’s talk about investments. Organizations often invest a lot of money into meaningful equities, bonds, and other investment instruments. And as a result, they get interested in their money every year. Investments are assets to the organizations since these investments can create direct cash flows.

Types of assets

In this section, we will talk about different types of assets.

Current Assets

Current assets are those assets that can convert into liquidity within a year. In the balance sheet, current assets are placed first.

Here’re the items that we can consider under “current assets” –

Cash EquivalentCash & Cash EquivalentCash equivalents are highly liquid investments with a maturity period of three months or less that are available with no restrictions to be used for immediate need or use. These are short-term investments that are easy to sell in the public market..read moreCash & Cash EquivalentsSCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read moreShort-term investmentsInventoriesTrade & Other ReceivablesPrepayments & Accrued IncomeAccrued IncomeAccrued Income is that part of the income which is earned but hasn’t been received yet. This income is shown in the balance sheet as accounts receivables.read moreDerivative AssetsCurrent Income Tax AssetsAssets Held for SaleForeign CurrencyPrepaid ExpensesPrepaid ExpensesPrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period.read more

Have a look at the example of current assetsExample Of Current AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more –

Non-current assets

These assets are also called “fixed assets.” These assets can’t be converted into cash immediately, but they benefit the owner for an extended period.

Let’s have a look at the items under “non-current assets” –

Property, plant, and equipmentGoodwillIntangible assetsInvestments in associates & joint venturesJoint VenturesA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.read moreFinancial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read moreEmployee benefits assetsDeferred tax assetsDeferred Tax AssetsA deferred tax asset is an asset to the Company that usually arises when either the Company has overpaid taxes or paid advance tax. Such taxes are recorded as an asset on the balance sheet and are eventually paid back to the Company or deducted from future taxes.read more

In the Balance SheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more, we add “current assets” and “non-current assets” to get the “total assets.”

Tangible assets

These are the assets that have a physical existence. As examples, we can talk about –

LandBuildingsPlant & MachineryInventoriesEquipmentCash etc.

Intangible assets

These are the assets that have value but don’t have a physical existence. For example, we can talk about the following –

Fictitious assets

To be precise, fictitious assets are not assets at all. If you want to understand “fictitious assets,” just follow the meaning of the word “fictitious.” “Fictitious” means “fake” or “not real.”

That means fictitious assets are fake assets. These are not assets but losses or expenses. But due to some unavoidable circumstances, these losses or expenses couldn’t be written off during the year. That’s why they’re called fictitious assets.

The examples of fictitious assets are as follows –

Preliminary expensesLoss on the issue of debenturesIssue Of DebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer.read morePromotional expensesDiscount allowed on the issue of sharesIssue Of SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner’s equity on the Company’s balance sheet.read more

Valuation of assets

Can we value the assets? For example, how would a business know what would be the worth of an investment after a few years down the line! Or the organization may want to calculate the value of intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more like patents or trademarks.

Well, there are methods for valuing assets. But why would an organization value without any reason? It turns out that valuation of assets would be required forInvestment analysis is the method adopted by analysts to evaluate the investment opportunities, profitability, and associated risks in their portfolios. In addition, it helps them to determine whether the investment is worth it or not.read more investment analysisInvestment AnalysisInvestment analysis is the method adopted by analysts to evaluate the investment opportunities, profitability, and associated risks in their portfolios. In addition, it helps them to determine whether the investment is worth it or not.read more, capital budgetingCapital BudgetingCapital budgeting is the planning process for the long-term investment that determines whether the projects are fruitful for the business and will provide the required returns in the future years or not. It is essential because capital expenditure requires a considerable amount of funds.read more, or mergers and acquisitions.

There are multiple methods through which we can value the assets. There are typically four ways an organization can value its assets –

Absolute value method: Under the absolute value method, the present valuePresent ValuePresent Value (PV) is the today’s value of money you expect to get from future income. It is computed as the sum of future investment returns discounted at a certain rate of return expectation.read more of assets should be ascertained. There are two models organizations always use – the DCF Valuation methodDCF Valuation MethodDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company’s future performance.read more (for multi-periods) and the Gordon model (for a single period).Relative value method: Under the comparative value method, the other similar assets are compared, and then the value of the assets is determined.Option pricing model: This model is used for specific types of assets like warrants, employee stock options, etc.Fair value accounting method: As per US GAAP (FAS 157), the assets should only be purchased or sold off at their fair value.

What are Liabilities?

Liabilities are something that an organization is obligated to pay. For example, if ABC Company takes a loan from a bank, the loan would be ABC Company’s liability.

But why do organizations get involved in liabilities? They go to the shareholders or sell the bonds to individuals to pump in more money. Who would like to get into obligations? The straight answer is often, organizations run out of money, and they need external assistance to keep moving forward.

The organizations that collect money from shareholders or debenture holders invest the money into new projects or expansion plans. Then when the deadline arrives, they pay back their shareholders and debenture holders.

Types of liabilities

Let’s see two main types of liabilities on the balance sheetTypes Of Liabilities On The Balance SheetNotes payable, accounts payable, salaries payable, interest payable, creditor, debenture/bonds, and owner equity are the many types of liabilities on the balance sheet.read more. Let’s talk about them.

Current liabilities

These liabilities are often called short-term liabilities. These liabilities can be paid off within a year. Let’s see the items we can consider under short-term liabilities –

Financial Debt (Short term)Trade & Other PayablesProvisionsAccruals & Deferred Revenue IncomeDeferred Revenue IncomeDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future. The examples include subscription services & advance premium received by the Insurance Companies for prepaid Insurance policies etc. read moreCurrent Income Tax LiabilitiesDerivative LiabilitiesAccounts PayableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read moreSales Taxes PayableSales Taxes PayableSales taxes payable refers to the liability account created when an entity collects sales taxes on behalf of the government and stores the aggregate amount of taxes before paying the concerned taxes authority.read moreInterests PayableInterests PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company’s balance sheet.read moreShort Term LoanShort Term LoanShort-term loans are defined as borrowings undertaken for a short period to meet immediate monetary requirements.read moreCurrent maturities of long-term debtCurrent Maturities Of Long-term DebtCurrent Portion of Long-Term Debt (CPLTD) is payable within the next year from the date of the balance sheet, and are separated from the long-term debt as they are to be paid within next year using the company’s cash flows or by utilizing its current assets.read moreCustomer deposits in advanceLiabilities directly associated with assets held for sale

Let’s have a look at the format of current liabilities –

Long-term liabilities

Long-term liabilities are also called non-current liabilities. These liabilities can be paid off over a long haul.

Let’s have a look at what items we can consider under long-term liabilities –

Financial Debt (Long term)ProvisionsEmployee Benefits LiabilitiesDeferred Tax LiabilitiesDeferred Tax LiabilitiesDeferred tax liabilities arise to the company due to the timing difference between the accrual of the tax and the date when the company pays the taxes to the tax authorities. This is because taxes get due in one accounting period but are not paid in that period.read moreOther Payable

Here’s an example –

If we add the current liabilitiesThe Current LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They’re usually salaries payable, expense payable, short term loans etc.read more and long-term liabilities, we would be able to get “total liabilities” on the balance sheet.

Why are liabilities not expenses?

Liabilities are often confused with expenses. But they are quite different.

Liabilities are the money owed by a business. For example, if a company takes a loan from a financial institution, the loan is a liability and not an expense.

On the other hand, the phone charges a company pays to connect with prospective clients are expenses and not liabilities. Expenses are the ongoing charges the company pays to enable revenue generation.

However, certain expenditures can be treated as a liability. For example, outstanding rent is treated as a liability. Why? Because unpaid rent denotes that space has been utilized for the year, the actual money is yet to be paid. As the money for rent is yet to be paid, we will assume it to be “outstanding rent” and record it under the “liability” head of a balance sheet.

Leverage and liabilities

There’s a strange relationship between leverage with liabilities.

Let’s say that a company has taken a loan from the bank to acquire new assets. If a company uses liabilities to own assets, the company is said to be leveraged.

That’s why it’s said that a good proportion of debt and equity ratio is good for business. If the debt is too much, it will harm the company eventually. But if it can be done in the right proportion, it’s good for business. The ideal ratio would be 40% debt and 60% equity.

If the debt is more than 40%, the owner should reduce the debt.

Critical Differences Between Assets and Liabilities

Assets will pay off the business for a short/long period. On the other hand, Liabilities make the business obligated for a short/long period. If obligations are deliberately taken for acquiring assets, then the liabilities create leverage for the business.Assets are debited when increased and credited when decreased. On the other hand, Liabilities are credited when increased and debited when decreased.All fixed assets are depreciated, meaning they all have wear & tear, and over the years, these fixed assets lose their value after their lifetime expires. The only land is a non-current assetNon-current AssetNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company’s investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.read more that doesn’t depreciate. On the other hand, Liabilities can’t be depreciated, but they are paid off within a short/long period.Assets help generate cash flow for businesses. On the other hand, liabilities are reasons for cash outflow since they must be paid off (however, there is a big difference between liabilities and expenses).Assets are acquired with the motive of expanding the business. Liabilities are taken to acquire more assets so that the business becomes free of most of the liabilities in the future.

Comparative Table

Assets vs. Liabilities Video

Conclusion

Both are part and parcel of business. Without creating assets, no business can perpetuate. At the same time, if the business doesn’t take any liability, then it will not be able to generate any leverage for itself.

If the business assets are appropriately utilized and liabilities are taken only to acquire more assets, a business will thrive. But that doesn’t always happen because of the uncontrollable factors business faces.

That’s why, along with generating cash flow from the main business, organizations should invest in assets that can generate cash flow for them from various sources.

As for any individual, the secret to wealth is to create multiple streams of income; for organizations as well, various streams of income are necessary to fight the unprecedented events shortly.

Differences Between Assets and Liabilities#

Assets vs. Liabilities Infographics#

What are Assets?#

Types of assets#

Current Assets#

Non-current assets#

Tangible assets#

Intangible assets#

Fictitious assets#

Valuation of assets#

What are Liabilities?#

Types of liabilities#

Current liabilities#

Long-term liabilities#

Why are liabilities not expenses?#

Leverage and liabilities#

Critical Differences Between Assets and Liabilities#

Comparative Table#

Assets vs. Liabilities Video#

Conclusion#

Recommended Articles#