Assets & Liabilities – Meaning, Legal Requirements

When calculating a company’s financial outlook, financial advisors consider both the company’s revenue and expenses, called assets and liabilities. These figures are vital because they can determine a company’s overall financial stability. Read further to understand assets and liabilities-meaning, their types, legal requirements, and to learn how companies use these values to estimate total value or equity. 

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Assets & Liabilities – Meaning Overview

In simple words, receivables are assets, while payables are liabilities. Another way to look at assets & liabilities – meaning is by profit and loss. For example, assets are investments that generate profit or income, while liabilities are losses incurred or expenses paid or to be paid. Another example for assets is cash whereas, bank debts are liabilities. 

Assets and liabilities both play a vital role in a company’s profitability and long-term viability. The way to maintain the same complying legal requirements is effective management for every business. Let’s learn about these entities in depth.

Assets

Assets are resources that help your company reduce costs, increase profits, and generate cash flow by converting raw materials into cash or cash equivalents. You can sell or exchange them for money. 

Alternatively, the sum of liabilities and equity helps determine asset value, i.e.,

Total assets = Liabilities Owner’s equity 

For any item to be an asset, it must possess the below-mentioned characteristics,

• You have control over it.
• You have control due to a past event.
• It’s a plus in terms of profit.

Types Of Assets: Based On Convertibility

Assets are classified as current or fixed assets based on their convertibility into cash.

Current Assets (Short-Term) 

Current assets comprise items a business consumes within the period of one year. Current assets are also known as liquid assets and include

• Accounts receivable

• Cash
• Cash equivalents
• Inventory
• Marketable securities
• Prepaid expenses

Fixed Assets (Long-Term)

Long-term assets are items that do not convert into cash or cash equivalents, allowing a business revenue over the course of many years. Also known as fixed assets or hard assets, investing in non-current assets is a good way to build wealth. Examples are 

• Land

• Machinery
• Building
• Patents
• Equipment
• Trademarks

Types Of Assets: Based On Physical Existence

Assets are classified as tangible or intangible based on their physical existence.

Tangible Fixed Assets

Tangible fixed assets are items with physical existence. Examples are:

• Land
• Building
• Equipment
• Machinery
• Office supplies
• Marketable securities
• Furniture
• Vehicles

Intangible Fixed Assets

Intangible fixed assets are items that do not possess physical existence. Examples include

• Patents
• Copyrights
• Trademarks
• Intellectual property
• Permits
• Market goodwill

Types Of Assets: Based On Usage

Assets are classified as operating or non-operating based on their usage or purpose.

Operating Assets

Operating assets are items that generate revenue from a company’s daily business practices. Examples include:

• Cash
• Inventory
• Building
• Accounts receivable
• Machinery
• Equipment
• Copyrights
• Goodwill
• Patents

Non-Operating Assets

Non-operating assets are items that are not required for daily business operations but can still generate revenue. Examples include:

• Short-term investments
• Vacant land
• Marketable securities
• Interest income from a fixed deposit

Liabilities

Liabilities are defined as obligations your company must meet. These usually play a significant role in financial expansion or for the smooth functioning of any business.  Depending on the company’s type, liabilities can be limited (owners are partially responsible) or unlimited (owners are solely responsible).  

The amount of existing liabilities is actually the difference between the total assets and owner’s equity, i.e., 

Total liabilities = Assets (receivables) – Owner’s equity

A liability:

• Imposes an obligation on the firm.
• The obligation arises from past events.
• Settling the obligation necessitate a loss of resources.

Types Of Liabilities

There are three main types of liabilities:

Current Liabilities(Short-Term Liabilities)

These are liabilities that are due and payable within one year. Management should closely monitor current liabilities to ensure that the company has enough liquidity to meet its obligations. These also serve as a key component of several short-term liquidity measures.

• Bills
• Taxes
• Trade creditors
• Bank overdrafts
• Short-term loans
• Accrued expenses

Non-Current Liabilities (Long-Term Liabilities)

These are liabilities that are due after a year or more. These liabilities usually help in expansion or buying fixed assets. A company’s solvency is at risk if it cannot pay its long-term liabilities on time.

• Debentures
• Long-term loans
• Bonds payable
• Capital leases
• Deferred tax liability

Contingent Liabilities

These are liabilities that may or may not arise, depending on a specific event. So, they are potential liabilities, and businesses must estimate them in a footnote to their balance sheet.

• Guarantee for loans
• Claim against product warranty
• Lawsuits

Disclosure Of Financial Assets And Liabilities: Legal Requirements

Assets and liabilities represent a company’s worth and origin of funds. Since every balance sheet has two halves: assets on the left and liabilities on the right, it means the total of all assets must match the sum of all liabilities. A successful business has more assets than liabilities, indicating it can meet its obligations.

Every business must present financial disclosures of the assets and liabilities in the balance sheet but in a logical order to meet legal requirements. As per schedule VI, the order for disclosure of financial assets and liabilities is as follows:

• Share Capital 
• Reserves and Surplus 
• Secured Loans
• Unsecured Loans
• Current Liabilities and Provisions
• Fixed Assets
• Investments
• Current Assets, Loans, and Advance Current Assets
• Miscellaneous Expenditures

Since the nature of these assets and liabilities is distinct, it necessitates different types of disclosures, risks, and tabulations of financial assets and liabilities.

Conclusion

A company’s resources are assets, while obligations are liabilities. An asset informs what a company owns, but liabilities show a firm’s debts. A company’s financial position depends on both assets and liabilities. To draw up a balance sheet properly, an entrepreneur must follow some rules to match legal requirements. To help our readers achieve satisfactory results, we have explained assets & liabilities – meaning in-depth in this guide.

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