What are assets and liabilities

Whether or not it is related to the world of accounting or finance, the concepts "Assets" and "Liabilities" are heard frequently.

They are terms or subjects that should be known by entrepreneurs, freelancers or anyone who wants to start in the branch of business or commerce.

They help to understand the accounting of a private business or company, and assess how projects of this type are going.

But even outside these fields, the use of these terms transcends family life and personal dynamics.

When financial concepts are handled, usually specialized; Those who are not used to these will almost always have doubts about it, in case they need to understand or assimilate them in the midst of specific situations where their use may be required.

We are referring in this article to Assets and Liabilities.

In a very simple way we can state that An asset will be the good or product that will generate income for whoever owns it, the opposite being a liability, that is, it will be everything that will cause us expenses.

An asset will be producing an increase in equity from time to time or on a recurring basis, and the liability will be the opposite, it will be causing losses in our capital.

In the "balance sheet" or "statement of financial position", there will be three key elements: Assets, Liabilities and Stockholders' equity, the latter also known as equity.  Assets are those resources available, with which the company will carry out its operations. They will be the goods or also the rights, which are property of this.

The liabilities for their part are the debts and obligations that the institution will have.

Assets will refer to what the company has and, on the other hand, liabilities to what the company owes. Let's see more details about these concepts

On going

An asset could be considered an investment that will help increase purchasing power. The most valuable assets will be those that produce the largest amount of money with the least effort.

Many assets will make a one-time profit, usually in the act of sale after appreciation, others will produce periodic profits.

Assets are the goods that will have a sale price or recovery price. Those that can be traded and figure the value of our assets or investments. It could be money that has been invested in bank accounts, mutual funds or stocks, valuables or works of art, cars, accounts receivable etc.

It is not considered appropriate to take into account in this sense the interests on investments or real estate income, since these types of income will form part of the monthly budget that will be used for current expenses.

Taking a company as a reference, the assets will be those goods, rights and other resources, which are economically controlled by it., the result of past events from which it is expected to obtain economic benefits in a future time.

In general we can say that "The Assets" will be everything that a company owns plus its investments

Regarding its nature, it does not need to be physical money as such, it is enough that it can be converted into economic returns that end up being translated into sources of liquidity.

The assets will be controlled by the company, and it does not have to be its owner in the legal sense.

What types of assets are there?

The Asset may include or contain various elements that will be part of the company, and will be divided into different groups.  In general, they are structured in two types according to the function they will fulfill in the operating cycle, it could also be by nature

Non-Current Assets -Long Term-

The Non-Current Assets will bring together those assets destined to be used in the company for a period of more than one year.

They are usually part of the longer-term decisions of the company and are converted to liquidity almost always through the amortization process. Financial investments will also be included, which will expire or be carried out in a period of time greater than 12 months.

Current Assets -Short Term-

This type of asset, Current Assets, will refer to the assets that a company has the prospect of selling, consuming or realizing in less than one year.. Cash and other possible liquid assets will be included.

Liabilities:

If we look at it in a business vision, the liabilities will be the current obligations that arose as a result of past events, for the extinction of which the company will deprive itself of resources that may produce future economic returns.

The Liabilities will be the set of debts that have to be settled through the benefits obtained with the Assets.

At a domestic level, a loan that is requested in some sense, insurance, mortgage, etc. they would be part of our liabilities.

What types of liabilities are there?

In a similar way as with Assets, there are many Liabilities and of different characteristics.

A form of classification can be taken considering the due date of the debt.

Non-Current Liabilities - Long Term-

It will be made up of the debts that are with third parties, with a maturity of over one year

Not only will they have a long-term maturity, they will also have a financial cost for the company and are frequently used to finance its Non-Current Assets.

Current Liabilities -Short Term-

It is also known as Current Liabilities. Corresponds to due date debts less than 12 months and that will be destined to finance the Current Assets of the company.

Assets and liabilities on the balance sheet of a company

In a balance sheet, it will be possible to assess how the assets of a company are on time. In this, the value of "things" or "debts" will be counted.

In this type of report, two parts can be clearly identified, that of assets and liabilities. In the case of assets, it will be counting what is being done with the money and in what form it is. Anything that exists in the company and has an implicit value will be reflected in the assets of the balance sheet. Anything that has value should have the quality of generating more value.

In the liabilities, the real ownership of the money that is available will be recorded. This may belong to the company or be a loan from the bank or others. The owners of these sums have to demand a return in exchange for providing the money, having a cost for the company to dispose of it.

Assets and liabilities in family finances

At a family level, it is very convenient to analyze and understand in detail which are those goods that cause us expenses and which generate cash flow. In this way we will identify what really happens in our context related to Assets and Liabilities.

Let's look at two cases, referring to the purchase of a home and the possession of a Vehicle.

Acquiring a home is interpreted as having financial stability, and if you look at it with an accounting perspective, it will be considered an asset, that is, part of our assets because in theory we can sell it, obtaining advantages from the action of the valuation.

For many and being realistic about personal finances, they will consider a house as a Liability. If you had a mortgage, the problem would be even worse because the property would be owned by the bank, and it would only be possible to use it if you had enough money to pay the mortgage.

In other words, in such a circumstance, the household will be taking money out of its pocket. You will also have to pay taxes, repairs, maintenance, etc.

If this house is put up for rent, profits will be obtained, and In one of these cases, the property would be becoming an Asset, it would be putting money in your pocket. This despite the fact that it has to be spent on maintenance, taxes, etc. Well, she herself will be paying those expenses.

The truth is that this has been a controversial issue and discussed by many.

A few years ago before the crisis, Spanish citizens would have affirmed that housing was an asset, and this without discussion. Currently due to the large depreciation of the value when it is sold, it could be a problem. In specific situations, the consideration that owning a home will tend to be worth more is questionable.

In any case, some consider the acquisition of a house an advantageous fact, appreciating it as an excellent asset., as long as your purchase is made in a timely manner, not leaning towards fashions, booms or other factors that could drive a poor choice

The particular circumstances, whether personal or financial, of a buyer, will turn a home acquired into a future asset or a truly negative liability for their assets.  

 If instead of a house we speak of a vehicle, we will see that the course followed is very similar. This will be almost a liability, since money will have to be spent on taxes, insurance, repairs, etc. in order to obtain the own benefit that it supposes.

If under specific circumstances a vehicle is used in such dynamics that it pays back profits, then it would be an asset, this if the money received were enough to also cover the expenses that the car generates.

In this context that we have put into perspective, the most relevant thing is to take into account that Assets will be leading us to balance and financial freedom, and although logically we may be acquiring Liabilities, Ideally, these should be adjusted to our economic capacity, in order to guarantee adequate family security.