What Are Assets and Liabilities? A Simple Primer for Small Businesses
Assets are what a business owns and liabilities are what a business owes. Both are listed on a company’s balance sheet, a financial statement that shows a company’s financial health. Assets minus liabilities equals equity, or an owner’s net worth. A company’s assets should be more than its liabilities, according to the U.S. Small Business Administration.
In this article, we’ll cover:
What Are Assets and Liabilities?
In accounting, assets, liabilities and equity make up the three major categories on a company’s balance sheet, one of the most important financial statements for small business. Assets and liabilities form a picture of a small business’s financial standing.
Assets are everything a business owes. They are found on the left side of a balance sheet.
There are two types of assets: current and fixed assets. Current assets are assets that can be quickly converted into cash. They include cash, accounts receivable and inventory. The more current assets a small business has the better, as this means they can survive longer without borrowing money.
Fixed assets are physical items that last over a year and have financial value to a company, such as computer equipment and tools.
Assets are also categorized as either tangible or intangible. Tangible assets are physical objects that can be touched, like vehicles. Intangible assets are resources that have no physical presence, though they still have financial value. Examples include copyright and brand recognition.
Liabilities are everything a business owes, now and in the future. They are found on the right side of a balance sheet. A common small business liability is money owed to suppliers i.e. accounts payable.
All businesses have liabilities, unless they exclusively accept and pay with cash. Cash includes physical cash or payments made through a business bank account.
There are two types of liabilities: current and long-term liabilities. Current liabilities need to be paid back within a year and include credit lines, loans, salaries and accounts payable. Many company expenses are current liabilities.
Long-term liabilities can be paid back after a year and include mortgages and bonds.
A business’s balance sheet helps an owner discover what their company is worth and determine the financial strength of their business, according to the U.S. Small Business Administration.
The accounting formula (also known as the basic accounting equation) is a way to calculate this net worth. To find this amount, use the following formula:
Total Assets – Total Liabilities = Equity
Equity means a company’s net worth (also known as “capital”).
Equity should be positive and the higher the number the better. A negative number means that the business is in trouble and action needs to be taken to minimize liabilities and increase assets.
The balance sheet should also be reviewed periodically to make sure a business’s liabilities are not growing faster than its assets.
Below an example that shows how assets and liabilities are positioned on a balance sheet:
This article shows you how to read and make a balance sheet. FreshBooks also has accounting software that generates a balance sheet automatically.
People also ask:
- What Is the Difference Between Assets and Liabilities?
- List of Assets and Liabilities
- Assets and Liabilities Examples
What Is the Difference Between Assets and Liabilities?
In accounting, assets are what a company owes while liabilities are what a company owns, according to the Houston Chronicle.
In other words, assets are items that benefit a company economically, such as inventory, buildings, equipment and cash. They help a business manufacture goods or provide services, now and in the future.
Liabilities are a company’s obligations—either money owed or services not yet performed.
A company needs to have more assets than liabilities so that it has enough cash (or items that can be easily converted into cash) to pay its debts. If a small business has more liabilities than assets, it won’t be able to fulfil its debts and is considered in financial trouble.
Still, liabilities aren’t necessarily bad as they can help finance growth. For example, a line of credit is taken out to purchase new tools for a small business. These tools will help the company operate and grow, which is a good thing. The trick is to make sure liabilities don’t grow faster than assets.
List of Assets and Liabilities
Below is a list of assets and liabilities:
- Cash (including petty cash)
- Accounts receivable (including customer deposits)
- Office furniture (filing cabinets, desks, sofas, chairs etc.)
- Office equipment (photocopiers, fax machines, postage meter etc.)
- Fixtures (sinks, lighting, faucets etc.)
- Deferred discounts
- Cell phones
- Computer hardware
- Computer software
- Lease agreements
- Costs incurred to improve a leased space
- Modular office buildings
- Company or customer parking lot or garage
- Any investment that matures in less than 90 days (i.e. stocks, U.S. treasuries, bonds, mutual funds, money-market funds)
- Pre-paid insurance
- Intellectual property (i.e. know-how)
- Brand equity (recognition)
- Company reputation
- Intellectual property
- Domain name
- Employment contracts
- Licensing agreements
- Client relationships
- Customer lists
- Accounts payable (money owed to suppliers, includes accrued payroll and accrued rent)
- Unearned revenue
- Customer credit
- Credit card
- Taxes on investments
- Wages owing
- Salaries owing
- Sales tax payable
- Interest payable
- Income tax payable
- Lawsuits payable
- Customer deposits or pre-payments for goods or services not provided yet
- Debt payable
- Lease agreement
- Insurance payable
- Benefits payable
- Accrued liabilities (such as interest that the lender hasn’t billed for yet)
Assets and Liabilities Examples
For a small business owner to truly understand her company’s financial standing, she needs to be aware of what qualifies as an asset and what qualifies as a liability, according to the Houston Chronicle.
Below are examples of common small businesses and what assets and liabilities they would have.
1. A Freelance Copywriter
- Assets: a laptop, a printer, cash in her business bank account, payments pending from two clients.
- Liabilities: an outstanding balance on her business credit card from buying a new laptop, an unpaid cell phone and internet bill, sales tax she’s collected and not yet remitted to the state.
2. A Hot Sauce Maker
- Assets: desktop computers, hot sauce inventory, machinery and equipment used to make the sauce (including containers and cooking gear), an unpaid invoice from a local grocery store chain that sells the sauce, the building purchased to house the business.
- Liabilities: payroll not yet paid to a staff of five, payroll and sales tax not yet remitted to the government, a bill for ingredients not yet paid, a line of credit taken out to buy new equipment, mortgage on the building.
3. A House Painting Business
- Assets: a company van, painting equipment, three painting contracts already in place, savings in the bank, computer and printer.
- Liabilities: business liability insurance owing, payroll owing to a staff of ten, taxes owing, painting supplies bought on credit, a business loan taken out to buy the company van.