An asset gives you future financial benefit.
Liabilities will give you a future obligation.
The proportion of assets to liabilities should always be higher.
Net worth* is the difference between what you own and what you owe.
Assets and liabilities are classified in two different parts. This classification of assets and liabilities helps in arranging assets and liabilities in a proper manner in the budget/balance sheet.
Assets will be different for individual and business (Companies).
Everything you or your business owns is an asset – cash, equipment, inventory, and investments.
Classification of Assets:
- Fixed Assets
- Current Assets
- Liquid Assets
- Wasting Assets
1. Fixed Assets
Fixed Assets are those assets which are to be used for a long period of time, such types of assets are also known as Long-term Assets.
For example, land, home, and building, plant and machinery, vehicles, equipment, patents, trademarks etc, are examples of Fixed Assets (without loan).
2. Current assets
Currents assets are those assets which can be converted into cash easily from the market within a year. For example: cash in hand, cash at bank, trade receivables, inventory, etc.
3. Liquid Assets
Liquid Assets are those which are already in the form of cash or can easily be convertible into cash and has a negligible effect on the price available in the market.
For example: marketable securities, government bonds, certificates of deposits etc.
4. Wasting Assets
Wasting Assets are the assets that have a useful life and as we use it depreciates with the time and after some time or years, it becomes useless.
For example: resources such as vehicle, mobile and natural resources. The value of these assets goes down as we take out the contents. And when we take out these completely, it will become useless.
Liabilities are what your business owes others.
For eg: home loan, personal loan, business loan or borrowed money from a friend? These are liabilities.
Classification of Liabilities:
- Long-term liabilities
- Short-term liabilities
- Fixed Liabilities
- Current Liabilities
- Contingent Liabilities
1.Long-term liabilities / Fixed Liabilities
Long-term liabilities are those which exist for one or more than one year.
For example a long-term home loan from the bank for 20 years.
2.Short-term liabilities / Current liabilities
Short-term liabilities are those which exist for less than one year.
For example a short-term personal loan from the bank for less than 1 year.
3. Contingent Liabilities:
Liabilities which are not actual liabilities but these can become the actual liability and it depends on the happening of certain events.
For example the deposit amount paid by a person or business in a court before a case, becomes a contingent liability if he loses the case since he won’t get the amount back.
I skipped few things which may not understand in the initial stage. That will get covered slowly in the upcoming days/weeks.
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- Compiled by Gopala Krishnan
