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 owners equity
or shareholder equity, basically meaning whats
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.
Heres 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.
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 companys
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 companys financial records (in addition
to owners equity). Understanding assets and liabilities
can help a business owner to better gauge the financial
health of their company, similar to the way an individuals
financial situation is determined by comparing what
they have of value personally as opposed to what they
owe to others.