Question and Answer: What are ASSETS, LIABILITIES AND EQUITY in Your Business?

Q: What are ASSETS, LIABILITIES AND EQUITY in Your Business?

A:  ASSETS: An asset that is not consumed or sold during the normal course of business, such as land, buildings, equipment, machinery, vehicles, leasehold improvements, and other such items. Fixed assets enable their owner to carry on its operations.

An asset is something valuable that an entity owns from which economic benefits are being generated.  It can also be defined as a piece of property or equipment purchased exclusively or primarily for the use of the business.

Assets can be classified into tangible and intangible assets. Tangible assets are things that you can usually see and touch, such as property, plant (machineries, generators etc), equipment and office furniture.  While Intangible assets are harder to value, like a business’ reputation.

Assets is also categorized into non-current assets (fixed assets) and current assets. Non-current assets are plant, property, equipment, motor vehicle, furniture and fittings. They are assets that are not consumed or sold during the normal course of business. Non-current (Fixed) assets enable their owner to carry on its operations.Current assets on the other hand are those assets generated in the course of doing business and they are cash, account receivables (debtors), inventory, etc.

Examples of business assets range from cash, buildings, equipment, and inventory to vehicles, patents, and office furniture.

LIABILITIES: A liability is an obligation of a business to an outside party.  It is the amount owed to a party. Liabilities can be short term and long term.  A short term liability is amount owing to an outside party and payable within twelve months. A common example is account payable (creditor). Accounts payable arise when a company purchases goods or services on credit from a supplier. Examples of short term liabilities are accounts payable, accrued expenses (expenses which has been incurred but not yet paid for), unpaid wages, overdraft and taxes. These obligations are eventually settled within twelve months.

The other type of liabilities is Long term liability which is always in form of loan to the business.  Long term loans are usually payable over twelve months. They could be in form of mortgage loans, bonds, or other bank loans etc. and always attract interest. They are legal obligations payable to a third party.

Settlement of a liability can be accomplished through the transfer of money, goods, or services.

EQUITY: In limited liability companies, equity Is money raised by a business in exchange for a share of ownership in the company. Ownership is represented by owning shares of the capital of a business.  However, with an enterprise, owners fund in the business is regarded as capital.

Equity is the value of an asset less the value of all liabilities on that asset. It is otherwise called “ownership equity” but is also referred to as risk capital or “liable capital. Equity is not repaid to the investor in the normal course of business.

All the above three issues are items that are reflected on the Statement of Financial Position otherwise called Balance Sheet.