If you think that assets are just property and haven't thought about why assets are equal to liabilities, it's worth reading!
Hi all! With you is Alexey Ivanov, the knowledge director of the online accounting “My Business” and the author of the telegram channel “Accounting Translator”. Every Friday on our blog on Klerke.ru I talk about accounting. I started with the basics, then I will move on to more complex matters. For those who are just preparing to become an accountant, this will help them get to know the profession better. Seasoned chief accountants should look at familiar categories from a different angle. Today we will understand the concepts of assets and liabilities.
What are assets
In simple terms, assets are resources that can generate income. The term refers to all types of property, both tangible and intangible. The first includes real estate, equipment, vehicles, the second - money or copyrights.
Various criteria are used to classify assets, as listed in the next section. Here it is necessary to note one of their main properties - the presence of an initial cost used to be reflected on the balance sheet of the enterprise.
Types of assets
As noted, assets are the property of a business entity, of all kinds, the classification of which occurs according to three main parameters. The first of them is functionality. Based on this parameter, the following types of assets are distinguished:
- Material. Includes real estate (land, buildings), products, equipment, transport, raw materials for production.
- Intangible. Illustrative examples of assets of this type are trademarks, licenses, patents, and copyrights.
- Financial. A simple and understandable resource, which is expressed in the form of cash - cash and non-cash, as well as debts of counterparties.
The second criterion for classification is participation in the production process. In this case, a distinction is made between current and non-current assets. The former are used in the main economic activities of the enterprise. Current assets include:
- money in any form;
- short-term investments;
- industrial reserves in the form of raw materials, inventory and finished products;
- debt by the debtor within a year;
- VAT that is subject to offset.
Non-current assets are involved in the activities of the enterprise many times. They transfer value into the price of the product gradually - through depreciation. Despite the complexity of the definition, examples of non-current assets provide a clear idea of the essence of the term. These include buildings, long-term investments, equipment and intangible assets.
The final criterion for dividing into types is the source of asset formation. According to this parameter, they are classified into gross and net. The acquisition of the former involves the use of own and borrowed funds. The purchase of the latter occurs using exclusively its own resources.
In the relevant literature you can find two more types of assets - hidden and imaginary. The first refers to assets that are not reflected on the balance sheet. For example, ongoing expenses for purchasing a license that did not bring results.
Imaginary assets are those that appear on the balance sheet but have no real value. A typical example is a debt that will not be repaid. Most of the imaginary assets are subsequently simply written off.
Results
In accordance with the structure of the balance sheet, assets can be divided into current and non-current - such a division indicates how intensively assets participate in business turnover during the reporting period.
The accounting procedure for various types of assets is established in special accounting provisions. You can find more complete information on the topic in ConsultantPlus. Free trial access to the system for 2 days.
What are liabilities
Liabilities mean the expenses of an enterprise aimed at forming assets, as well as the obligations of an economic entity in relation to counterparties who act as creditors.
Examples of liabilities are:
- taxes;
- mortgage and consumer loans;
- money that is borrowed;
- various types of property.
The last point requires separate explanation. The fact is that any property forms both assets and liabilities of the enterprise, which depends on the nature of its practical use. For example, buying an apartment is accompanied by expenses and acts as a liability. But in case of further rental, the property begins to generate income and becomes an asset.
The example shown clearly demonstrates the difference between an asset and a liability. At the same time, the relationship between both terms is clearly visible, which is discussed in more detail below.
Table of potential investments
| Assets | Receiving a profit |
| Bank deposits | Money stored in a bank account (ruble or foreign currency) generates passive income thanks to accrued interest on the investment |
| Business | Money can be invested in a business that will generate income over time |
| Stock | When purchasing shares, the owner can expect to receive dividends from business profits. You can make a profit both from annual income and from the sale of shares |
| Bonds | Purchasing long-term bonds will create a stable source of income for many years. Interest on bonds is accrued once or twice a year |
| Real estate | Investing in real estate is considered the most reliable way to generate passive income. Such a purchase guarantees the owner a constant flow of funds from rent. In addition, the price of real estate increases every year |
| Shares and units in mutual funds (mutual investment funds) | This method is usually used by people who want to quickly and easily invest their capital, without thinking about what and where. For profitable and effective use, the money is placed under the management of professionals who charge a certain percentage for their services. |
| Precious Metals and Collectibles | Investing in gold, silver, paintings, rare coins and other items is one of the best and most reliable ways to invest your savings, as their value is constantly growing |
| Machinery, equipment, transport and more | The owner of these things can receive revenue from their operation |
In addition to the usual sources of income, there are non-standard assets. These can be content sites, YouTube channels, promoted Instagram profiles, VKontakte public pages, photo stocks.
Types of liabilities
Liabilities are classified according to two basic criteria. The first is the nature of formation. According to this parameter, liabilities are divided into the following categories:
- Capital and reserves. They represent constituent capital, accumulation funds, retained earnings and other similar sources of asset formation.
- Obligations of the enterprise. They are further divided into two groups: short-term, which provide for repayments within a year, and long-term with a closing period exceeding 12 months. Examples of financial obligations of an organization are loan debt, deferred tax payments, debts to counterparties, etc.
Based on how they are reflected in the balance sheet and the need for repayment, liabilities are divided into three categories:
- Imaginary. By analogy with assets, they are reflected in the balance sheet, but are either already closed or do not require return.
- Hidden. Existing debts, but for some reason not reflected in the balance sheet. Usually taken into account in the next reporting period.
- Actual. The usual type of liabilities that actually exist and are reflected in the balance sheet.
Interaction of assets and liabilities
One of the basic principles of accounting is that the assets and liabilities of an organization are always equal to each other. This is achieved by reflecting each transaction in two accounts at once - one for credit, the other for debit. The rule is called the double entry method.
We need to give a simple example. Operation – purchase of bricks. Accounting for the organization's assets reflects the transaction by reducing the amount of cash and increasing the amount of inventories by a similar amount. The overall value does not change. The transaction does not affect the liabilities in any way. The result of the accountant’s work and the double entry rule is that the amount of assets and liabilities remains equal.
With some degree of convention, the balance sheet of an enterprise can be presented in the format of the table below. It lists the main types of assets and liabilities of a business entity.
| Organizational assets | Liabilities of the organization |
| Negotiable. Includes goods for sale during the year and cash. | Equity. Owners' funds collected in the form of a foundation fund. |
| Non-negotiable. Property not intended for sale: real estate, equipment, vehicles, long-term investments, etc. | Reserves for future payments. Accumulation funds and other enterprise reserves. |
| Future expenses. Costs that are reflected in accounting for the next reporting period. For example, office rent paid for 2 years. The payment for the second year is deferred. | Long term duties. Loans with a maturity of more than a year, shares and bonds issued by the enterprise, debts to counterparties that do not require payment within the next year. |
| Revenue of the future periods. The situation is similar to that described in the previous paragraph. But it applies to income that is not yet reflected in the balance sheet. For example, an advance payment for goods that will be delivered next year. | Short-term liabilities. Current expenses of the enterprise planned for the next 12 months. |
The language of financial literacy
To be financially successful, you need to know financial language and communicate in it as often as possible. You should understand the basic terms, especially if they can be applied in your field of activity. At least when managing a personal and family budget.
For more information on how to manage a family budget, read the article (opens in a new window).
The concepts of Assets and Liabilities are only a small part of financial terms. Let's look at a few more financial concepts.
Income
Income is the money that we, as well as members of our family, if any, receive for our work and knowledge. In this article we will be referring specifically to money, since income can be either in the form of any items or intangible. For example, we did someone a favor, and for this they gave us a mobile phone. We can now sell it and get money.
Thus, income is all the money that comes to us from our activities and assets.
Income can be good and bad. This division is not related to their size
