by Cody Hodge

Created on: June 16, 2009

What is the difference between a financial asset and a financial liability? Well, one is a debt, and the other is something that you use in order to prove the wealth of your company. When you are running a business you want to have more assets than liabilities, and if you have too many liabilities your business can go under. If you don't have enough assets, you could go under as well, so it is good to maintain a good amount of assets, and a low level of liability.

A liability can be anything really. It can be a debt, a bill, or any promise that you make to someone that you will give them something in the future. If you buy a product from a company, the amount that has to be paid for that product is called a liability. If the company goes under, the next owner is responsible for all liabilities, which would include paying off any debts. If a company has too many liabilities, it can be forced to declare for bankruptcy protection, or just close its doors forever.

An asset is anything that the company owns. An asset can be a building, an employee, or any cash that a company has on hand. These all go toward paying off liabilities, and satisfying any debts that the company has. Ironically enough, a liability can be incurred from obtaining assets. To acquire things you have to pay for them, and those assets come with short-term liabilities. However, an asset is a good thing to have in the long run as it helps the company operate.

A liability can also take on various forms. A liability can be a debt that you owe another company, but it can also be the result of a judgement, or an error by an employee. If a judge rules against your company, you have a responsibility to pay, and it becomes a liability, because you have to pay someone either now or in the future. Either way, that goes into the books as a liability, and goes against the worth of the company in case of a sale.

Assets have value, but that value can be long lasting. If the price of the land that your company owns goes up, so does the value of the company. Employees get faster as they work for your company longer, increasing production, and increasing the amount of stuff the company can produce. The value of goods produced can go up, and anything else that you own can go up in value over long periods of time. This can be helpful if the company is ever sold, as it can help pay other debts if there is a cash crunch.

Again, it's not necessarily rocket science when you think about it. Assets are good things that a company wants to help it run its business. A liability is a bad thing, and includes bills or any other judgements rendered against the company. Too many liabilities will kill a company, and not enough assets will do the same thing.

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