by Juan Leer

Created on: January 30, 2007   Last Updated: April 17, 2007

Understanding assets and liabilities is one of the biggest things to know in the course of business. If you have a good understanding of how they work, then you will be able to understand a lot of about financial statements. To put it in the simplest possible terms, assets are anything that will help your business make money or increase your wealth in the future. Liabilities are things that will decrease your wealth (or your assets). In general, you use your assets to pay off liabilities.

Furthermore, there are many distinctions to be made within the general heading of Assets and Liabilities. One such thing is the labeling of them as current or non-current. In general, current assets are things such as cash, short-term accounts receivable, or investments that might be available for sale. Current liabilities are things that will generally require the use of current assets to pay of. In the case of receivables (as an asset) or payable (as a liability), these will be labeled current generally if they are due within one year or within the current operating cycle. Anything longer than that will be seen as being long-term.

Assets are anything of value that your company owns, including cash. Assets get recorded on the balance sheet in terms of their dollar values. One thing to keep in mind, even if you used credit to purchase an asset, you still own it. Its full dollar value gets recorded on one side of the balance sheet as an asset, and the amount you owe gets recorded on the other side of the balance sheet as a liability. There are many different types of assets, including: Current Assets, Investments, Capital Assets, and Intangible Assets.

Now, Liabilities are anything that a company owes to people or businesses other than the owner. In general, there are 2 different types of liabilities: short-term (must be paid less than a year) and long-term (longer than a year).

On the balance sheet, the relationship can be seen through the basic accounting equation:

Assets = Liabilities + Owner's (Stockholder's) Equity

Those are just the basic differences between assets and liabilities. One helps you make money, the other does not. That is the simplest way of putting things.

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