Difference Between Assets and Liabilities

Feb 12,2018 | Finance

In order to understand the difference between assets and liabilities, it is important to begin by defining the terms. An asset refers to any possessions that contain a substantial monetary value that a company can trade for cash in order to offset its outstanding debts. Examples of assets include cash at hand, cash in the bank, motor vehicle, machinery et cetera.

On the other hand, a liability refers to the extent to which a company or organization may be called upon to meet its outstanding financial debts. One of the most common types of liability is creditors. There are various types of liability depending on the extent of obligation involved as well as the timeline within which the said obligation must be met.

Types Of Assets And Liability

The difference between assets and liability also manifests in their various types. Assets can be classified into either tangible and intangible or current/liquid and fixed. Tangible assets are the physical possessions a company has including but not limited to vehicles, machinery, inventory as well as lands and building. On the other hand, intangible assets refer to a company’s possessions that reserve monetary value but that cannot necessarily be seen or touched, such as patents, Accounts Receivables and contracts.

Assets are also classified into fixed and current assets. Current assets are those that a company can sell, consume or convert into cash within a period of 12 months. They include things such as cash at hand, perishable food commodities et cetera. On the other hand, fixed assets refer to those assets that a have a lifespan of at least a year. Lands, buildings and machinery all fall under this category.

Just like assets, liability also takes different forms. Liability can either be grouped based on the extent of obligation involved or the timeline within which the said obligation has to be met. When it comes to the extent, we have limited and unlimited liability. Limited liability is when a company may be called upon to meet its debt obligations but within a specified sum of money.

Limited liability is often determined by the amount of a business or company’s share in an investment. On the other hand, unlimited liability occurs when a business or company is called upon to meet its debt obligations, where this extent is expressed as infinite. This basically means that if a company owns another company, group or organization, it is liable to meet all the outstanding debts without necessarily distributing it based on the number of shareholders it has.

Another way liability can be classified is with regards to the timelines and here, we have current/short-term and long-term liability. Current liability refers to the debts a company owes that can be paid off within a period of 12 months. They include short-term loans, payday loans etc. On the other hand, long-term liability refers to debts that a company can only pay off after a period of 12 months and the most common ones are long-term loans.

Conclusion

Evidently, the only way to understand the difference between assets and liabilities is by exhausting each term individually. On a concluding note, the easiest way to identify assets and liability is to take any bookkeeping statement such as a balance sheet.

All the variables recorded on the left-hand side are assets while all those recorded on the right-hand side are liabilities. The difference between the two equals the company’s equity, or in simple terms capital.