Topic 3
Definition of assets, liabilities and owner’s equity (capital)
Asset refers to anything of value, tangible or intangible, that an individual or a business which owns them can claim benefit from their ownership such as movable properties, immovable properties, claims, acquired value, expenses resulting in entitlements, and expenses applicable to the next accounting period. From the aforementioned definition, assets in the context of accounting possess several charactieristics as follows:
Cash and cash equivalents such as cash, government bonds and various negotiable instruments (Cash does not refer only to banknotes and coins but also cheques and bank deposits).
Assets which are claims such as accounts receivable.
Tangible assets such as land, building, car, office furniture, and machinery.
Intangible assets such as patent, copyright, and concession.
Other kinds of assets such as inventory, i.e. items possessed by a business for trading or servicing.
Expenses which are paid and will be beneficial to the next accounting period such as various types of prepaid expenses.
Assets of an individual: Each individual must have his/her own assets.
Example 1: Mr. Kayan Reandee has assets as follows:
Assets of a business: Each business or store must use various assets in its operations.
Example 2: Thor Nam Thai Store has assets as follows:
Remark: Assets in accounting must have 2 properties as follows:
1. Have a monetary value
2. Be capable of being owned
Liability is an obligation or cash granted to a person or business as a result of a borrowing transaction which requires repayment to an outsider in the future according to the right to claim the outsider has over the business as a result of such borrowing.
Liabilities of an individual: Liabilities of an individual are caused by purchasing of assets by means of installment payment or loans from creditors.
Example 1: Mr. Rak Nakbunchee bought a television priced 10,000 baht by means of installment payment at 500 baht per month for 20 months. If Mr. Rak Nakbunchee has already paid 4 months installments, he still has liabilities totaling 8,000 baht to be repaid.
Liabilities of a business: A business normally has more liabilities than an individual due to purchasing of goods on credit terms or liabilities from unpaid expenses.
Example 2: Thor Nam Thai Store took on a bank loan of 30,000 baht to spend on trading activities. Therefore, Thor Nam Thai Store has a debt, i.e. a bank loan of 30,000 baht to be repaid in the future according to the agreement. If Thor Nam Thai Store fails to repay the debt according to the agreement, the bank has the right to file a lawsuit to force repayment of the bank loan.
Owner’s equity (capital) refers to capital which the owner invests in the business either in the form of cash or other assets, including net profit which is still not allocated to owners. The business may have a single or multiple owners, depending on the type of business.
Example 1: Thor Nam Thai Store has assets and owner’s equity (capital) as follows (in case it is free from liabilities):
From Example 1, Thor Nam Thai Store has total assets worth 250,000 baht equal to the ownership of assets worth a total of 250,000 baht (net assets). It is concluded that Thor Nam Thai Store has assets equal to capital which is 250,000 baht.
Example 2: Thor Nam Thai Store has assets and owner’s equity (capital) as follows (in case it has liabilities):
From Example 2, it can be seen that Thor Nam Thai Store has total assets of 250,000 baht but it has an obligation to repay a bank loan worth 30,000 baht. Therefore, the ownership over assets after deduction of liabilities is 220,000 baht (net assets).