Assets vs Liabilities: How to Tell the Difference

Assets vs Liabilities: How to Tell the Difference

Did you know know that corporations in the U.S. have over $10 trillion in debt?

While these might seem like a lot of debt, most of these corporations also have assets. Assets and liabilities are part of a well-balanced corporation. If you want to learn more about assets and liabilities, you came to the right place.

Read on to learn about assets vs liabilities.

What Is an Asset?

In the financial world, you hear the word asset often, but what does it mean. Financially speaking, an asset is an item of value purchased in a transaction. Keep in mind; an asset is also something that you capitalize on.

The most common types of assets are short-term and long-term assets.

Short-term Assets: Short term assets are those types of assets that you can convert to cash in less than 12 months. Examples of short-term assets include cash, inventory, prepaid expenses, and accounts receivable.

Long-term Assets: While long-term assets can also be converted into cash in less than 12 months, the intention is to keep these in your inventory longer. The most common long-term assets include property, plants, buildings, equipment, and notes receivable.

What Is a Liability?

In financial terms, liabilities are different types of claims on your assets, such as loans you took out on a property. Other liabilities include expenses your asset has incurred.

Short-term Liabilities: The two most common types of short-term liabilities include accounts payable and accrued expenses.

Accounts payable include products or services you purchase and have the opportunity to pay in 30 days. For example, if you own a construction company and need to purchase equipment, you would pay for the equipment when you get paid; on the other hand, accrued expenses d, accrued expenses are liabilities that you don’t have to pay within 30 days. The most common accrued liabilities include employee tax withholding, sick, and vacation days.

Long-term Liabilities: For many businesses, the only long-term liability they will accrue is a business loan. For example, they might take out a 3-year business loan to pay for a piece of equipment or a 30-year loan to pay for a property.

Assets Vs Liabilities

Although assets and liabilities are different, there are intertwined. Here is the equation most accountants use: liabilities + equity = assets. It would help if you had equity and liabilities to accumulate assets.

Liabilities are the claim others have over your assets, such as a bank or creditor. And equity is the claim you have over your assets.

For example, if you own a retailer, you will buy inventory only to pay it off in 30 days. Once you pay it off or sell it, you will accumulate assets.

The same goes for a property; at the start of the loan, the loan will have liability over your property. However, as you start to pay it off, the equity will become an asset.

Now You Know the Difference Between Assets and Liabilities

Now that you know more about assets vs liabilities, you’ll be better prepared to handle your company’s finances.

Remember, liabilities are the claims others have over your assets, while assets are the accounting claims you have over your assets.

If you enjoyed these financial tips and would like to learn more, check out the rest of our blog.

Leave a Reply

Your email address will not be published. Required fields are marked *