Tuesday, June 06, 2023

Comparison of Assets and Liabilities

Comparison of Assets and Liabilities

A business is run on two important components, and these are known as assets and liabilities.

Assets give the business benefits in the future, and this benefit is not limited to only one accounting period, whereas liabilities are a burden on business as they reduce the profit earned and are generally the amount that a business owes to its creditors.

It is always recommended to have a higher ratio of assets in comparison to liabilities as it is good for business.

Types of Assets

Assets can be classified into the following types:

  1. Current asset: Assets that can be easily converted into cash or similar cash equivalents.
  2. Non-Current asset: Also known as fixed assets, these assets cannot be converted into cash or cash equivalents easily.
  3. Tangible asset: Assets that are having a physical existence, i.e. which can be touched, seen and felt.
  4. Intangible asset: Assets without any physical existence.
  5. Operating asset: They are those assets that are required for the daily operations of the business.
  6. Non-operating asset: They are assets which can generate revenue even when not being utilized for daily operations.

Types of Liabilities

Liabilities can be classified into the following types:

  1. Current Liabilities: Obligation towards creditors or debt that needs to be paid within the accounting year. Also known as short-term liabilities.
  2. Non-Current Liabilities: Those debts or obligations that are due for payment in over a year.
  3. Contingent Liabilities: Liabilities that will arise, depending on the outcome of an event.

Comparison between Assets and Liabilities

Assets and Liabilities are two concepts that are exactly opposite to each other. The difference between assets and liabilities can be represented in a tabular form as shown below:

Basis of Comparison Assets Liabilities
Based on the definition Assets provide benefits to a business Liabilities bring an obligation to the business
Depreciation Assets can be depreciable Liabilities are non-depreciable
Cash Flow generation Generates cash flow over the years Is responsible for the outflow of cash over the years
Equation Assets = Liabilities + Equity Liabilities = Assets – Equity
Position in the Balance Sheet Right Left
Examples Cash, Goodwill, Motor, Building Accounts Payable, Bank Overdraft

This comparison was done in tabular form, to learn more about the objective of tabulation and the different concepts of accounting, stay tuned to BYJU’S.

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