What are assets and liabilities in a business?

Anyone going into business needs to be familiar with assets and liabilities. They make up the core fundamentals of your business’ finances which is why it’s important to know what they are and why they’re important.

This guide will look at assets and liabilities, answering questions like ‘Is cash an asset?’ and ‘Is inventory an asset?’, as well as:

• What are assets and liabilities, and how do they work?
• What are the main types of liabilities and assets?
• How do assets and liabilities affect my business?
• Examples of assets and liabilities for different types of businesses

We’ll also look at why identifying your business liabilities is so important and other definitions of liabilities in business.

Assets, liabilities and equity are the three main components of a company’s balance sheet. This is one of the most important financial statements for small businesses. Equity refers to how much a share in your company is worth, and assets and liabilities help to form a picture of your company’s financial position.

Assets are everything your business owns and come in two categories: current assets and fixed assets. 

Current assets are assets that convert into cash quickly, including cash, short-term investments, accounts receivable (money owed to you), and inventory. The more current assets you have, the better because it means you have more funds to pay expenses without borrowing money. 

Fixed assets are items that have value to your business and last longer than one year. These assets can be tangible (physical objects), such as equipment, machinery, or properties, and intangible (non-physical entities), such as copyrights or your brand name. 

Liabilities refer to everything your company owes, now and in the future. Common smaller liabilities include money that you owe to suppliers and unpaid invoices. 

Liabilities fall into two categories – current and long-term (or non-current) liabilities. Current liabilities include credit lines, loans, accounts payable, and salaries, which must be paid back within one year. Long-term liabilities, including mortgages and bonds, can be paid back after a year. 

Current liabilities also include:

• Bank overdrafts
• Sales taxes
• Payroll taxes
• Income taxes
• Outstanding expenses

More examples of long-term liabilities include:

• Capital leases
• Long-term borrowing
• Pension liabilities
• Deferred revenues and taxes

In a nutshell, assets help you make goods or provide services, depending on what your business does. Your company needs assets to be successful and grow. And your company needs more assets than liabilities to have enough money to pay debts and other financial commitments. If you don’t have enough assets, you won’t be able to pay what you owe and could end up in financial trouble. If the situation gets bad enough (hopefully it never comes to that), you could be forced to close up shop.

While liabilities might seem negative to you now, they are a natural part of business. Liabilities like business loans can help with financial growth as you can use the money to invest in your company. 

For example, if you invested in better equipment or tools, you could improve your services to benefit your business and drive more income.

They can also make transactions between businesses more efficient. Using accounts payable for liability payments can benefit your cash flow and give you flexibility to pay suppliers.

For example, you run a cafe and have a supplier bring your cold drinks to the premises every two weeks. They deliver a couple of crates of bottles and canned beverages, and you pay them within the month, instead of on delivery. This allows you to pay the drinks company when it doesn’t impact your cash flow, and they aren’t disrupted by non-payment.

In this example, you count the total of your invoice as a liability (in your accounts payable) because you are due the money in the short term in return for the products. The drinks supplier, in turn, counts your invoice as an asset (in their accounts receivable) because they are legally owed the money.

We’ve listed four examples of businesses in different sectors to give you an idea of what assets and liabilities look like when put into practice:

A freelance writer’s assets and liabilities may look something like this:

Assets:

• A laptop or computer
• A printer
• Cash in their bank account
• Pending payments from clients

Liabilities: 

• Outstanding credit balance (for example, after purchasing a new laptop)
• Unpaid phone or internet bill

A self-employed contractor’s situation could look as follows:

Assets: 

• Company vehicle
• Tools and equipment 
• Contracts already in place for jobs
• Savings in their business current account

Liabilities: 

• Accounts payable to suppliers
• Business loan taken out to buy the vehicle and equipment
• Taxes they still have to pay
• Tools bought on credit

For a small catering business, assets and liabilities can look like this:

Assets: 

• Company van or truck
• Food and drink inventory 
• Machinery and equipment used to make food
• An unpaid invoice from a client
• The building they bought to house the business
• The brand name

Liabilities: 

• Salaries not yet paid
• Outstanding payroll and sales tax
• Money that they owe suppliers
• Mortgage for the business building
• Small loan repayments from buying new equipment

Assets and liabilities for a small marketing agency with five employees could manifest like this:

Assets:

• Computers
• Printers
• Brand name
• Pending payments from clients
• Cash in the business current account
• The office space they own

Liabilities:

• Business loan taken out to start the business
• Salaries they haven’t paid employees
• Unpaid income and payroll taxes
• Mortgage on the office space

As you can see, assets and liabilities look similar in most business situations. After reading this guide, we hope you have a better understanding of what assets and liabilities are and how they affect your business.

Let’s look at some other examples of assets and liabilities. These could be long-term or current and will depend on your business and when you are required to pay back the money you owe for things like:

• A business loan
• A mortgage on a business property
• A rent payment on a business premises
• Any other bank debt, such as overdrafts or charges on an account
• Supplier contracts you owe
• Other accounts payable entries, such as invoices for contractors’ work
• Other financial obligations, such as paying wages or freelancers
• Taxes due to be paid to HMRC
• Utility bills and insurance monthly payments

New to the world of business? Managing your finances can be confusing and hard to do alongside running your business. The Countingup business account makes bookkeeping and tax prep simple for small business owners, so you can spend more time growing your business.

Find out more here.