Assets vs Liabilities – Difference and Comparison

What are Assets?

Assets are the things a company owns, have value and may be sold to generate cash, and are used in business operations. Assets can be classified in various ways such as in terms of liquidity, or in terms of whether they are tangible or not.

If it takes less than one year to convert an asset into cash, then it is known as a current asset, and cash is part of it. Examples of current assets are things like stocks, bonds, and property that can be sold in a short time for cash.

Those assets that take longer to be turned into cash and involve a lengthy process are referred to as long-term assets. You can take more than a year to sell a company vehicle or piece of land, for instance. Long-term assets that a company owns include land, buildings, vehicles, machinery, or tools. 

Intangible assets are items that are not physical, but it would be hard to run a company without them. Examples of these items are patents, copyrights, trademarks, and goodwill. 

Intellectual property is also an asset, and it is classified in the intangible category. Universities and research institutions are good examples of institutions or businesses that use intellectual property as assets to operate.

What are Liabilities?

Liabilities are debts or obligations of a company that have not been paid yet. Most businesses run by borrowing or acquiring items from vendors on credit. Additionally, they have to pay salaries and wages, and it is not possible to do this in advance.

There are current liabilities which are short-term obligations that become due within the next 12 months. They include items such as accounts payable, accruals, and short-term debt.

Long-term liabilities are obligations that get paid any time after the first 12 months. They include items such as long-term debt and deferred taxes. An example of long-term debt includes borrowing money to buy an extra bus because a school has had an increase in student population.

We can say that liabilities are a necessary evil in the running of a business. They are, in many cases, unavoidable, by the very nature of how big companies run. They help businesses expand and thus get more profits.

When liabilities are higher than assets, it is a sign that the business is likely to be unable to meet its obligations to creditors. No one wants to lend their money to potentially bad creditors, and financial institutions are no different.

Difference Between Assets and Liabilities

Assets and liabilities are two of the basic concepts in accounting. Both assets and liabilities appear on the balance sheet of a company, and help tell its financial state. However, there is a marked difference between assets and liabilities in that liabilities represent debts while assets represent what is owned by a company.

The liabilities of a company are the obligations that have not been paid yet. Assets represent what is owned by a company. Assets generally include cash, property, investments, and any other thing of value that is owned by the company.

Comparison Between Assets and Liabilities

Parameter of comparisonAssetsLiabilities
OwnershipOwned by the companyOwed to creditors and Shareholders
Placement on the Balance SheetThey are placed on the left side in their order of liquidity.They are placed on the right side according to their maturity dates or payment periods.
ImportanceA business cannot operate without assets whether current or long-term.It is not mandatory that businesses have liabilities in order to operate. Examples are Sole proprietorships and family businesses.
Liquid cashInclude liquid cash.Do not include liquid cash.
Company StateThey show the strength of a company.Show what a company owes to creditors and shareholders.

References

https://books.google.co.ke/books?hl=en&lr=&id=AxUsEAAAQBAJ&oi=fnd&pg=PR1&dq=corporate+finance+fundamentals&ots=OGwBD3ASc0&sig=v2STLgdilEQemb-qwHL-OrjlPAc&redir_esc=y#v=onepage&q=corporate%20finance%20fundamentals&f=false