Whether or not you're an accounting professional, everyone should understand the basics of assets and liabilities. Understanding the difference between these two financial accounts can mean all the difference between becoming wealthy or becoming poor. The purpose of this article is to explain the difference between these two accounts and to provide some basic accounting knowledge that can teach even the most dim-witted person how to understand financing.
Assets are anything that can be owned by an individual or business that has a positive cash value. In other words, assets generate income. What are examples of assets? Investments, real estate, businesses are all examples of things that can generate you more money then you initially put into them. Assets are things that you can see a ROI (return on investment) off of. There are three classifications that assets can be categorized under. There are current assets, fixed assets, and intangible assets. Knowing the difference between these three classifications can be very beneficial to you in deciphering how to record income on financial statements.
Current assets are considered cash on hand or assets that can be turned into cash within a short amount of time. Current assets fund daily operations. Companies use current assets to run their daily operations, because this is better then spending money on interest from short term financing. There are five different accounts listed under current assets. These accounts include cash, investments, accounts receivable, and inventories and prepaid expenses.
Fixed assets are considered tangible property. Fixed assets can not be easily converted into cash like current assets can. Fixed assets would include property, machines and equipment, and buildings. There are other such items like computers that can be considered fixed assets so it is best to check with an accountant to see what can be considered fixed assets. Fixed assets get special tax treatment and can also be depreciated.
Intangible assets are considered monetary items that can not be physically touched. Such items can be converted over to cash, but usually hold value to the individual or business entity. Examples of intangible assets would be patents, trademarks, and copyright. There are two different types of intangible assets, which are classified as legal intangibles and competitive intangibles. It is recommended that you see your accountant for more advice on intangible assets as well.
Now that we have covered assets, we have to speak of its' evil twin-liabilities. Liabilities are anything that is owed by an individual or business that must be repaid. Liabilities do not generate us money, but costs us money. Liabilities are debts that must be repaid back and usually with interest. There are two classifications that liabilities can be categorized under. There are current liabilities and long-term liabilities. Both of these classifications of liabilities must be paid back and are considered debt.
Current liabilities are considered debt that must be repaid within a year's time. This debt usually is repaid through the current assets account; however, this is not always the case. There are many different categories of current liabilities. Some categories of current liabilities are notes payable, accounts payable, short-term debt, and dividends payable.
Long-term debt or liabilities are considered debt that can be repaid after a year's time. An example of a long-term debt would be a lease or deferred taxes.
After explaining the differences of what are considered assets and what are considered liabilities, it must be stated that it is in the best interest of both the individual and business to have a lot more assets than liabilities. This is how people become wealthy, because they try to not acquire too many liabilities, especially if the assets generating income can not afford them.
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Source by Dawn Lambie