Whether you are an accountant or not, everyone MUST understand the basic concepts of assets and liabilities. Understanding the difference between these two financial accounts can make a difference if you will get rich or poor in the future. The purpose of this article is to explain the differences between these two accounts and provide basic accounting knowledge that can teach the wisest person to understand finances! So, if you don’t want to end up poor, keep reading…
Assets are anything that a person or a company with a positive cash value can have. In other words, Assets generate income! What are some examples of assets? Investments, real estate and businesses are examples of things that give you more money than you originally invested. Assets are things where you can see a return on investment (ROI). There are three classifications under which assets can be classified. There are current assets, fixed assets and intangible assets. Knowing the difference between these three classifications can be very useful for deciphering how income is recorded in financial reports.
Assets are often grouped according to their liquidity or the speed with which the asset can be converted into cash. The most important asset in your balance is effective; it can be used immediately to pay a liability. The opposite is an illiquid asset such as a factory, because the sale process (converting the property into cash) is likely to be long.
The most liquid assets are called current assets. Non-liquid assets are grouped in the category of fixed assets. These include real estate, vehicles and machinery. Your assets are invested by your company and contribute to income, but are not consumed in the income generation process and are not retained for cash conversion purposes.
Income And Expenses
Turnover is the money your business makes when you do business. For example, if you have an ice cream parlor, customers buy ice cream. Expenses are the costs you incur to generate this income. The ingredients you buy to make the ice cream, the salary you pay to your employees, the rent, and the services you pay for your stand are all fees. In order to survive, a company’s revenues must exceed its expenses.
The Savings Delusion
When you understand these basic financial principles, it is much easier to create a personal finance plan that helps you grow, especially when you understand this. With an average interest rate of .06%, savings accounts grow very slowly, and with an average inflation rate of 3.22%, the account is really losing value, even if the balance shows ever-slower numbers.
With this in mind, we do not seem to be wise. Keeping cash in a bank account or becoming a cushion becomes a liability in the sense of Rich Dad, and it is better to invest in some other asset. This is where Heleum comes into play. As an accelerator of savings, the algorithm takes advantage of the volatility of the currency market to make intelligent transactions with their savings, which compensates the benefits of inflationary policies in their own game. Although there is a risk of loss of investment, there is a guaranteed loss in traditional savings strategies.
The most liquid assets are called current assets. These assets generate income for your company.
Non-liquid assets are grouped in the category of fixed assets. These include real estate, vehicles and machinery. Your assets are invested by your company and contribute to income, but are not consumed in the income generation process and are not retained for cash conversion purposes.
are considered cash or assets that can quickly become cash. Current asset also referred to as short-term assets finance the daily business. Companies use current assets to manage their day-to-day business, since it is better to spend money on short-term financing rates. Current assets include five different accounts. These accounts include cash, investments, accounts receivable, inventories and prepaid expenses.
cannot simply be converted into cash, as current assets can. Fixed assets include goods, machinery and equipment, as well as buildings. There are other elements such as computers that can be considered as attachments. Therefore, it is better to consult with an accountant what can be considered as fixed assets. Fixed assets are subject to special tax treatment and can also be amortized.
are considered monetary items that cannot be physically damaged. These items can be converted into cash, but generally have a value for the individual or commercial unit. Examples of intangible assets would be patents, trademarks and copyrights. There are two types of intangible assets classified as Legal Intangible and Competitive Intangible. It is recommended that you also contact your tax advisor to obtain more information about intangible assets.
Now that we have covered the assets, we have to speak of its’ evil twin-liabilities. Liabilities are all that a person or company owes that must be paid. Debt does not generate money, but it costs us money. Liabilities are debts that must be paid and generally with interest.
To sell a liability, the company is forced to sell a certain economic advantage. These economic benefits could include cash, other assets or the provision of a service. A current measure is an analytical tool that determines whether a company can easily pay off its short-term debt. Examples of current liabilities are debt, overdrafts and short-term bills.
Liabilities are listed in the balance sheets as loans or credits and are listed according to current or long-term payment terms. Short-term liabilities are all that must be paid in a short period of time. All longer-term liabilities are classified as long-term. Non-current liabilities include loans, tax obligations, unsecured obligations and pension payments.
Two classifications allow you to classify liabilities. There are current liabilities and long-term liabilities. Both classifications of Liabilities must be returned and are considered as debts.
are Liabilities that must be repaid in a short period of time. These debts are generally amortized using current assets; however, this is not always the case. These include the accounts payable i.e. bill that you have to pay on monthly basis, the Notes Payable-loans taken from banks meant to be repaid within 30 days and the Accrued charges, taxes, salaries, interest etc. but the balances of each must be repaid. There are different categories of Current liabilities. Some categories of current liabilities are promissory note, loans, account payables, short time debts and dividends.
also referred to as long-term liabilities, are liabilities or obligations that are due in over a year’s time. Long-term liabilities are an important source of long-term financing for a company. Companies have long-term liabilities to immediately raise capital to finance the purchase of capital or to invest in new investment projects. Long-term liabilities are important to the long-term solvency of a company. If companies cannot pay their long-term debt at maturity, the company faces a solvency crisis. Lists of non-current liabilities include: Bonds payable, Long-term notes, payable, deferred tax liabilities, Mortgage payable, Capital lease
Contingent liabilities are liabilities that may arise depending on the outcome of a future event. Contingent liabilities are therefore potential liabilities. For example, if a company were faced with a $ 100,000 request, the company would be liable if the request was successful. However, if the request does not succeed, the company will not be responsible. Accounting rules recognize a contingent liability only if the obligation is probable and the amount can reasonably is estimated. List of contingent liabilities includes: List of contingent liabilities: Lawsuits, Product warranties
MAIN DIFFERENCES Between Assets and Liabilities
The following points are important in terms of the difference between assets and liabilities:
- In accounting, assets are properties that can be converted into cash in the future, while liabilities are debts that will be settled in the future.
- Assets refer to financial resources offering future economic benefits. On the contrary, liabilities are financial obligations that require payment in the near future.
- Assets are depreciable items, that is, each year a certain percentage or amount is deducted as depreciation. On the other hand, liabilities are not depreciable.
- On the balance sheet, the assets are displayed on the right and the liabilities on the left. In addition, total assets and total liabilities should tally.
- Assets are classified as current and non-current assets. On the other hand, liabilities are classified as non-current and current liabilities.
- Examples of assets: receivables, real estate, inventories, patents, furniture, etc. and examples of liabilities: trade payables, liabilities, bank loans, overdrafts, etc.
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