Anyone going into business needs to be familiar with assets and liabilities. If your business were a living organism, these would be its vital signs. Assets and liabilities are the fundamental parts of your company’s financial position.
This guide will help you understand 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 for different types of businesses.
What are assets and liabilities?
Assets, liabilities and equity are the three major components of a company’s balance sheet, which 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 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 you can convert into cash quickly, including cash, short-term investments, accounts receivable (money that’s owed to you), and inventory. The more current assets you have, the better because it means you have more funds close at hand 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
How do assets and liabilities affect my business?
In a nutshell, assets help you manufacture your goods or provide your services. Your company needs assets to be successful and grow.
Your company needs more assets than liabilities to have enough money to pay your debts and other financial obligations. If you don’t have enough assets, you’ll fail to pay what you owe and could end up in financial trouble. If the situation gets bad enough, you could be forced to close up shop for good.
While liabilities may seem all-negative to you now, they are actually a natural part of your business. In fact, liabilities like business loans can help with financial growth since you can use the money to invest in the company.
For example, by purchasing new tools or better equipment, you can improve your services, which would benefit your business.
Examples of assets for different businesses
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:
1) A freelance writer
A freelance writer’s assets and liabilities may look something like this:
- A laptop or computer
- A printer
- Cash in their bank account
- Pending payments from clients
- Outstanding credit balance (for example, after purchasing a new laptop)
- Unpaid phone or internet bill
2) A self-employed contractor
A self-employed contractor’s situation could look as follows:
- The company vehicle
- Tools and equipment
- Contracts already in place for jobs
- Savings in their business current account
- Accounts payable to suppliers
- Business loan taken out to buy the vehicle and equipment
- Taxes they still have to pay
- Tools bought on credit
3) A catering business
For a small catering business, assets and liabilities can look like this:
- Company van or truck
- Food and drink inventory
- Machinery and equipment used to make the food
- An unpaid invoice from a client
- The building they bought to house the business
- The brand name
- Salaries not yet paid
- Outstanding payroll and sales tax
- Money they owe suppliers
- Mortgage for the business building
- Small loan repayments from buying new equipment
4) A small marketing agency
Assets and liabilities for a small marketing agency with five employees could manifest like this:
- Brand name
- Pending payments from clients
- Cash in the business current account
- The office space they own
- 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, you should have a decent grasp of what assets and liabilities are and how they affect your business.
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