Assets vs liabilities 2023: Here’s Why You need Assets

Updated On: November 22, 2022

Knowing your small business from an accounting perspective is one of the smartest things you can do as a business owner. After all, if you don't understand your financials or accounting assets, how can you make sound decisions about where to allocate your resources?

Your business statements give you a snapshot of your company's financial health at a given moment, and by tracking these statements over time, you can get a clear picture of your business trends.

Assets vs. liabilities

The balance sheet is one of the most important statements for understanding your business's financial health. The company's balance sheet lists all of the assets and liabilities that your business owns or is responsible for.

This information is essential because it can help you determine your business's net worth–that is, the value of your business after all debts and obligations have been paid.

But not everyone understands how to read a balance sheet, let alone what all of the terms mean. If you're new to business accounting or need a refresher, this guide will explain everything you need about assets vs. liabilities on a balance sheet.

Assets Vs. Liability Overview

Assets:

  • Anything your business owns or is owed can be classified as an asset, including cash, investments, property, inventory, accounts receivable (money owed to your business by customers), and equipment.
  • Assets can be either liquid or fixed; liquid assets are easily converted to cash, while fixed assets take longer to sell and convert into money.
  • Accounts receivable are liquid assets because you can receive customer payments anytime.

Liabilities:

  • Liabilities are anything your business owes to others that won't generate revenue, including money owed to suppliers, loans, and credit card debt.
  • Marketable securities are the most liquid type of liability and can be converted into cash quickly if necessary.
  • Accounts payable are financial obligations your business has to pay its suppliers for goods or services it has received. 

What Are Assets?

Anything your business owns or is owed can be classified as an asset. This includes cash, investments, property, inventory, accounts receivable (money owed to your business by customers), and equipment. In short, anything that has value and can be used to generate income for your business is an asset.

Some assets are more liquid than others, which can be easily converted to cash. For example, your inventory is a liquid asset because you can sell it to customers and receive some money in return.

On the other hand, your real estate is considered a fixed asset because it would take longer to sell and convert into cash. The accounts receivable are also considered a liquid asset because you can receive customer payments anytime.

Different Asset Types

The Asset Types

Assets are not only one-dimensional. There are divided into further categories. To completely understand your balance sheet, you need to know about the different types of assets:

Current Assets

Current assets are those that can be converted to cash within one year. This category includes cash, investments, accounts receivable, and inventory. These assets are important because they provide your business with the funds it needs to cover short-term obligations, such as paying bills and salaries.

If your business doesn't have enough current assets to cover its short-term liabilities, it may have to take out a loan or sell some of its fixed assets to raise the necessary funds.

Fixed Assets

Many businesses confuse fixed assets with current assets. However, there is a big difference between the two. Fixed assets cannot be easily converted to cash and are long-term assets. This category includes real estate, equipment, and vehicles.

These assets are important because they help your business generate income over the long term. However, they can also tie up a lot of your business's capital, so it's essential to carefully consider whether you need a fixed asset before making a purchase.

Current and fixed assets are vital to any business; both are unique and provide different benefits to businesses.

Intangible Assets

Intangible assets are those that do not have a physical form but still have value. This category includes intellectual property, such as patents, copyrights, and trademarks. Intangible assets are important because they can give your business a competitive advantage.

For example, if you have a patent for a new product, your competitors will not be able to sell that product without your permission. However, tangible assets are also important because they can be difficult to value and may not generate income for your business.

Business Assets

Business assets are classified as anything your company owns, creates, or profits from in some capacity.

They can include physical items such as cash and raw materials to more conceptual property like intellectual capital. If an asset is something your company uses to make money, it’s considered a business asset.

Physical Assets

Have you ever thought about all of the physical assets your business owns? Physical assets like buildings, vehicles, and equipment have a physical form.

These assets are important because they help your business generate income and grow. Without these assets, your business would not be able to function.

All these types of assets are essential for businesses. Depending on the industry, one asset might be more important than the others. For example, a manufacturing company might have more fixed assets because it needs equipment to produce its products. On the other hand, a software company might have more intangible assets because its products are digital and can be easily copied.

What Are Liabilities?

Liabilities are anything your business owes to others that won't generate revenue. This can include money owed to suppliers, loans, and credit card debt.

Liabilities are essential because they represent a claim on your business's assets. If your liabilities exceed your assets, your business is considered insolvent. Your creditors could force your business into bankruptcy and seize your assets to repay your debts.

The total liabilities of a business are typically broken down into further types. The marketable securities will be the most liquid, which can be converted into cash quickly if necessary. This would include investments in stocks, bonds, and money market accounts.

Liabilities

Accounts payable are financial obligations your business has to pay its suppliers for goods or services it has received. This would include any invoices that have not yet been paid.

If your business cannot pay its accounts payable, your suppliers may stop doing business with you or demand immediate payment.

Your business may also have long-term debt, a loan that will take more than one year to repay. This could include a mortgage, equipment loan, or business loan. The following types of liabilities are also included on a balance sheet:

Current Liabilities

Current liabilities are those that need to be paid within one year. This category includes accounts payable (money your business owes to suppliers), taxes, and short-term loans. These liabilities are essential because they represent a claim on your business's current assets.

If your business doesn't have enough cash to pay its current liabilities, it may have to sell some of its assets or take out a loan to stay afloat.

Long-Term Liabilities

Long-term liabilities are those that need to be paid after one year. This category includes things like long-term loans and bonds. For long-term debt, you must ensure that your business will still generate enough future revenue to make the payments.

Otherwise, you may sell some of your assets to repay the debt. The sales tax with the purchase of the new company car is an example of a long-term liability.

Liabilities also include things that are not monetary. These are called contingent liabilities. For example, if you are being sued, the amount of money you may have to pay if you lose the lawsuit is a contingent liability. Another example is if one of your employees gets into an accident while driving a company car, your business could be liable for any damages.

What's Considered Good Assets To Own?

Some businesses lease their office space or equipment, but others purchase these items outright. If you own your office space and equipment, they appear on your balance sheet as assets. The same is true for any property or vehicles that your business owns.

These are all things that can be sold if your business needs to generate cash quickly. The total assets on your balance sheet should always be greater than the total liabilities. This is because assets can be used to pay off liabilities if needed. Below are some examples of good assets to own:

Gold IRAs

The old saying goes, "never put all your eggs in one basket." When it comes to retirement planning, this adage is especially true. Diversifying your assets is essential to mitigating risk and maximizing returns.

And what better way to diversify than by investing in a gold IRA? Gold has long been considered a haven asset, providing stability and security in times of economic uncertainty. Moreover, gold is a tangible asset that can be passed down from generation to generation.

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For those not in the know, a gold IRA is an Individual Retirement Account in which physical gold bars or coins are held as investments.

Some people view gold IRAs as an excellent way to protect their retirement savings from inflation, while others see them as a hedge against economic downturns. While there is no right or wrong answer when investing in gold, there are some things to consider before deciding to invest in a gold IRA.

For starters, it's important to remember that gold is a physical commodity subject to theft or damage. In addition, gold prices can fluctuate greatly, so investors need to be prepared for both the ups and downs of the market.

Finally, storage and insurance costs are associated with owning gold, which must be factored into the decision-making process. Despite these considerations, many still believe that gold IRAs can be valuable to their portfolio.

So whether you're looking to protect your retirement savings or hedge against economic turbulence, investing in a gold IRA may be worth considering.

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Stocks

When it comes to stocks, there are a lot of different opinions out there. Some people think stocks are an excellent asset, while others believe they are too risky.

However, the truth is that stocks can be a tremendous asset if they are appropriately managed. The accounting equation is one of the most important things to understand about stocks.

This equation states that assets equal liabilities plus equity. In other words, if you own stock, you have an ownership stake in the company that issued the stock. This ownership stake can be worth more or less than what you paid, depending on the company's performance.

However, over time, companies tend to increase in value, which means that your ownership stake will likely increase. As a result, stocks can be an excellent asset if you are patient and don't mind a little risk.

Real Estate

Regarding assets, real estate is often considered one of the best investments you can make. Unlike stocks and bonds, which fluctuate wildly in value, real estate is a physical asset that tends to appreciate over time. And, unlike many other investments, real estate generates income through rent payments from tenants.

In addition, real estate provides a hedge against inflation, as property value typically increases along with the cost of living. For all these reasons, many wealthy individuals and families consider real estate a sound investment.

So if you're looking for a safe place to park your money, you could do much worse than investing in some property.

Businesses

Many different types of businesses are considered good assets to own. One type of business that is often thought of as a good asset is a franchise. Franchises have a proven track record and are often associated with desirable brands. Another type of business that is often seen as a good asset is a family-owned business.

Family-owned businesses often have strong ties to their communities and can offer stability and security to owners. Finally, businesses with a strong online presence are also often seen as good assets.

These businesses usually have a broad reach and can provide owners with a consistent income stream. Whatever type of business you are considering, be sure to do your research to ensure that it is a good asset for you.

What's Considered Bad Liabilities To Have?

Bad liabilities

We all know that liabilities can be a pain; whether it's paying back student loans, credit card debt, or even your mortgage, it can feel like you're drowning in payments. But what is considered the "bad" liabilities to have? Here are a few of the most common:

Expensive Cars

Expensive cars are often seen as status symbols. But beyond the glitz and glamour, there are some dangers to owning an expensive car. For one thing, they're usually targets for crime. Car thieves are always looking for high-end vehicles, and the cost of replacing one can be astronomical.

In addition, expensive cars tend to come with higher insurance rates. And if you get into an accident in an expensive car, the repairs can easily bankrupt you.

So while that shiny new sports car may be tempting, it's important to remember that it's not all fun and games. Sometimes, the risks far outweigh the rewards.

Credit Card Debt

Credit card debt is considered bad for several reasons.

  • It can take years to pay off if you only make the minimum payments.
  • It's easy to rack up a lot of debt without realizing it. Three, interest rates on credit cards are usually high, which means you end up paying more in the long run.
  • Your credit score will suffer if you miss a payment or two.

In short, credit card debt is best avoided if possible. However, if you do find yourself in debt, there are some things you can do to get out of it. You can start by making a budget and sticking to it.

You can also transfer your balance to a 0% APR credit card or take out a personal loan with a lower interest rate. Whatever you do, make sure you get rid of that debt as soon as possible.

Income Tax liability

Who likes taxes? Nobody, right? But what if I were to tell you that there are reasonable taxes and bad taxes? You see, when it comes to your income tax liability, it's considered a bad liability to have.

Here's why:

First, income taxes are usually based on a percentage of your income. So, the more you make, the more taxes you'll owe. Second, income taxes are often recurring expenses, so you'll have to keep paying them yearly. And third, income taxes can be costly, particularly if you're in a high tax bracket.

So, if you're looking to improve your financial situation, it's best to reduce your income tax liability.

Lucky for you, you can do a few things to minimize your tax bill. For example, you can take advantage of tax deductions and credits. You can also invest in tax-advantaged accounts, such as a 401(k) or IRA.

And finally, you can try to negotiate a lower tax rate with the IRS. By taking these steps, you can take control of your income tax liability and help improve your financial situation.

Why You Need Assets And Zero Liabilities

You've probably heard the saying, "Assets exceed liabilities." Maybe you've even seen it written on a whiteboard or in a company presentation.

But what does it mean? In a nutshell, it means that your assets should be greater than your liabilities. Here's why:

  1. It allows you to weather financial storms. If you have more assets than liabilities, you'll have a cushion to fall back on if you experience tough times financially. This can help you avoid going into debt or defaulting on loans.
  2. It gives you peace of mind. Liabilities can be stressful, whether worrying about making your next credit card payment or how you will pay off your mortgage. When your assets exceed your liabilities, you can rest assured knowing that you're in good financial shape.
  3. It sets you up for success in the future. A strong asset base gives you more options and flexibility when making financial decisions. For example, you may be able to invest in better-performing assets or take on more risk without putting your financial stability at risk.
  4. It provides security for your family. If something happens to you, your family will be taken care of financially if your assets exceed your liabilities. This can help give them peace of mind during an already difficult time.
  5. It gives you the freedom to live the life you want. When your assets outpace your liabilities, you'll have more disposable income to use however you see fit. Whether taking that dream vacation or saving for retirement, having excess assets can make all the difference.

Simply put, there are many good reasons to ensure that your assets exceed your liabilities. So take a look at your financial situation and see if there's room for improvement. You may find that making a few changes can make a difference.

FAQ:

What's The Most Important Asset To Have?

The most important financial asset to have is a gold IRA. A gold IRA is an individual retirement account backed by physical gold. When you invest in a gold IRA, your money is stored in a secured location and insured against theft or loss.

Gold has been used as a currency for centuries, and it's considered one of the most stable investments available. In times of economic instability, the value of gold tends to increase. So if you're looking for a way to protect your savings, investing in a gold IRA is smart.

Is Rent A Liability Or Asset?

It can be both. A rental property can be a liability if the mortgage or rent payment exceeds the tenant's monthly income. It can also be an asset if the mortgage or rent payment exceeds the tenant's income.

If a property is rented out below market value, it can also be seen as an asset because it increases in value over time. However, if a property is rented out above market value, it can be seen as a liability because it decreases in value over time.

Final Thoughts

No matter the economy's state, it's always a good idea to have more assets than liabilities. This will give your business the flexibility it needs to weather any storm. Consider purchasing property, stock, or Gold if you want to increase your assets.

These things can generate income or buffer against tough economic times. In contrast, liabilities can only be a burden. So make sure you're always looking for ways to increase your assets. Don't let your business become weighed down by liabilities.

About the Author

Colin Shipp is a marketer who has been working remotely full-time since 2015. He specializes in growth marketing, content marketing, online courses, and remote work. On ColinShipp.com he writes about strategies he is using in his own life.