To make your company keep running, there are two things that need to be balanced: assets and liabilities. But before diving into the processes, we first need a good understanding and the basic differences between the two categories of your company’s balance sheet.
Assets are what a business owns, and liabilities are what a business owes. Both the assets and liabilities of a company are listed on the balance sheet and show the financial health of the company. To determine your company’s net worth, you can minus your assets from your liabilities. If your assets are more than your liabilities your company or business is in good financial condition, but if your company or business has more liabilities than assets, you may need to balance it out because eventually, liabilities will drain your business out.
What is an asset?
To earn a good amount of revenue, your business needs to have useful resources. These resources may be in the shape of cash, investment, or propertyw which are all assets. The more the assets the better the health of the financial condition your company is in, and it provides a better future economic benefit. Some common assets are:
- Real estate
- Office furniture
- Office equipment
- Machinery and vehicles
There are two types of assets; current assets and fixed or non-current assets.
Current assets can easily be converted into cash or cash equivalent. These are also called liquid assets as they tend to dissolve and appear quickly, i.e., within a year.
Some examples of current assets
- Short term deposits
Non-current assets can be converted into cash or cash equivalent in a short amount of time and are beneficial for an extended period. They can also be termed as fixed assets. Physical items that last over a year and have financial value to a company like computer equipment are fixed assets. Some examples of non-current assets:
- Real estate (land or building)
- Machinery and equipment
There are two more subtypes of assets – tangible and intangible assets. Tangible assets are those which have physical existence, means we can feel and touch it, and intangible assets are those which do not have a physical existence but still have a financial value, like copyright and brand recognition.
What is liability?
Liability can be anything and everything a company owes. It is the money or debts that need to be paid or the services that you are obliged to provide or perform. Every small and big business has liabilities unless they pay via cash or through a business bank account. Some examples of liabilities are:
- Taxes of all types
- Business loans
- Mortgage debts
- long term borrowing
- pension and security
- withstanding expenses
There are two types of liabilities: current and long-term liabilities.
Current liabilities are due within the same accounting year. These can be bank overdrafts, taxes of all types, short term loans, etc.
Non-current liabilities are not obligated to be paid or returned in a brief period i.e., the same accounting year. These are also called long-term liabilities and can be capital leases, pension and security, shares or bonds, mortgage debts, etc.
If a small business has more liabilities than assets, it will not be able to fulfill its debts. This means that the business is in financial trouble. If you are a small business owner, make sure your liabilities don’t grow faster than your assets.
Do you need help with your annual accounts, taxes, bookkeeping, VAT registration? Are you looking for a tax advisor? Finchley Business Services offer 360° accounting services with simple cost-effective solutions to help your business grow.