If you are a business person then you will like to be acquainted with all the business terms. Some of the common business terms are assets and liabilities. But in this article, we are going to see about Assets. Do you want to know about it’s definition? Asset denotes anything of value or a resource of value that can be converted into cash. Individuals, governments and companies have many assets that they own. With the help of the assets, they generate revenue. But the company may also benefit in other ways if they own assets. That is why the assets owned by a company play an integral part.
Further, there are different types of assets too. Here you can learn all there is to know about assets. So know what assets are so you can understand their importance.
Table of Contents
- Why are assets beneficial?
- What are the different types of assets?
- Assets vs Liabilities
- 2. Types of Liabilities
- Examples for assets vs liabilities
Why are assets beneficial?
Business people prefer to accumulate assets because it provides short term and long term profits for the business. The asset can appreciate in years and can offer good returns for the business if it gets sold. Or some assets can depreciate too.
The businesses use a balance sheet to know the value of the assets, liabilities and the stockholders’ equity. They do this to track how the assets measure up to the liabilities. Also, if there are any problems in the balance sheet the businesses will try to solve the problem. Therefore having the correct amount of assets helps the company to know its financial status and growth.
What are the different types of assets?
These types of assets are considered highly liquid assets as they can be quickly sold and converted into cash. Some of the assets like cash, bonds, mutual funds and other securities in business are known as liquid current assets. They can be sold and their price will not be affected. So the businesses can use the current assets anytime and get solid cash.
The fixed assets are known as long term assets or hard assets. They may take a long time to be made into cash. Also, they cannot be sold quickly at the required value. Some of the fixed assets are furniture, machinery, building, land and more.
These are real property assets such as real estate, inventory, furniture, cash and more. They have tangible meaning always in the possession of the owner. Further, the tangible assets belong to the category of current assets.
The intangible assets are items that are not physically available. But in theory, they are present. Some examples of intangible assets are patents, brand reputation, intellectual property, and more. Also, they boost the growth of the business.
There are new kinds of asset that have become popular in this modern age. The digital assets definition is the assets held in digital storage or drive. Also, many businesses store them in the computer system. But sometimes the items made by hand can also become a digital asset such as handwritten notes and painting if they get scanned.
Some of the examples of digital assets are photos, design files, PDFs, company branding, marketing content and more. Therefore digital assets are also an important part of a business.
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Assets vs Liabilities
Accounting majors will know how important it is to differentiate between assets and liabilities. One equation drilled into their heads is Assets = Liabilities + Equity. So with this equation, an accountant will check if the transactions are balanced or not. The assets get balanced with liabilities and equity. But first, know what the definition of liabilities is.
- Meaning of Liabilities
The liabilities are claims made on the assets. Sometimes they directly claim on the assets like taking a bank loan to purchase a building. So the business will check the liabilities when it incurs an expense. Further, the liabilities are other people’s claims on the assets and the equity is the business’s claims on the asset. You have to know-how assets and liabilities interact in business to understand their difference.
2. Types of Liabilities
1. Short-term liabilities
The two major short term liabilities are accrued expenses and accounts payable. The accounts payable is entered in the sheet when the business purchases a product or service. Also, the normal terms will offer the business the chance to pay in 30 days. On the other hand, the accrued liabilities are the balance sheet liabilities that have to be paid. But they do not have a direct invoice.
2. Long-term liabilities
In a business, the long-term liabilities are bank loans. They will take some businesses to pay.
Examples for assets vs liabilities
Inventory vs. payables
For most businesses, the accounts payable is related to inventory. The business owner will buy the required inventory and pay it off when it sells. Or else they will pay off within 30 to 60 days.
In the beginning, both inventory and payables will increase but after that, both of them will get split. Also, it is for the business owner to decide how and when to sell the inventory and clear the payables.
Buildings vs. long-term debt
All the buildings acquired by a business are financed by long term debt. This allows the business to grow and have bigger space. But the buildings and long-term debt are split when the initial transaction is done. At the same time, the loan payments are done automatically. If the building gets sold before the loan is paid then the proceeds will be enough to pay the rest of the debt.
The assets show the financial growth of the business and also its many dealings. The different types of assets in a business have to be managed properly. Then only the business can stand the test of time.
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