Business Terms: What Are Assets and Liabilities?
Assets Assets are the properties of a business. They are owned by the business and are expected to be of future benefit e.g. furniture and fitting, motor vans for transportation of goods, equipment, stock, cash, land and buildings, etc. An asset is an item that will give present or future monetary benefits to a business as a result ... Continue Reading
Assets are the properties of a business. They are owned by the business and are expected to be of future benefit e.g. furniture and fitting, motor vans for transportation of goods, equipment, stock, cash, land and buildings, etc.
An asset is an item that will give present or future monetary benefits to a business as a result of economic events. Therefore, an asset is basically an item or money that the business owns.
Classification of Assets:
a) Fixed or non-current assets
b) Current assets.
Fixed or Non-Current Assets
These are assets that can last for a long period of time. They are used for future production, e.g. furniture and fittings, machineries etc.
A fixed or non-current asset is acquired for the purpose of use in the business and is likely to be used by the business for a considerable period of time (more than 1 year).
Categories of Fixed Assets:
a) Tangible fixed assets (physical items such as land, buildings, machinery, and vehicles, the purchase of which is known as ‘capital expenditure’).
b) Intangible fixed assets (non-physical items, which are very difficult to place a value on, such as brand names, goodwill and patents; assets that cannot be seen and touched, although they have value, e.g. copyright).
c) Financial fixed assets (investments that the business has, such as shares and debentures in other companies).
These are assets that can last for a short period of time, e.g stock, cash at hand, cash in bank.
A current asset is either part of the operating cycle of the enterprise or is likely to be realised in the form of cash within 1 year.
Categories of Current Assets:
a) Cash in the bank.
b) Cash on the premises (“petty cash”).
c) Debtors (customers who have purchased goods on credit, and have not yet paid).
d) Stock (raw materials, work-in-progress and unsold finished goods).
e) Prepayments (where the business has paid in advance for the use of an item, rent for example).
This is an amount owed by the business to outsiders. It is an obligation to pay someone in either money or money’s worth, e.g. creditors, bank overdraft, etc.
A liability is the amount outstanding at the balance sheet date, which the business is under obligation to pay. Therefore, a liability is basically an item or money that the business owes to a third party.
Classification of Liabilities:
a) long-term liabilities
b) current liabilities
A long-term liability is a source of long-term borrowing and will exist on the balance sheet for more than 12 months.
Categories of Long-Term Liability:
a) Bank loans.
b) Mortgages (essentially a long-term loan to purchase land and buildings).
A current liability can be simply defined as amounts of money owing to third parties which will be settled within 12 months. They arise mainly through the process of day-to-day trading. These liabilities are usually payable within a short period, usually a year, e.g. creditors, loans, etc.
Categories of Current Liability:
a) Bank overdraft.
b) Creditors (suppliers who the business has not yet paid).
c) Accruals (debts for which a bill has not yet been received).
d) Corporation tax (owed to the Government).
e) Dividends payable.