1). What is Liability?
Liabilities are the opposite of assets. They refer to things that you owe or have borrowed. Assets are things that you own or are owed.
- Liability is generally something that's owed to someone else.
-Liability can also mean a legal or regulatory risk or obligation.
-Current liabilities are a company's short-term financial obligations that are due within one year.
-Long-term, non-current liabilities are listed on the balance sheet as obligations but they're not due for more than a year. In other words, They're expected to last 12 months or longer.
2). Liabilities vs. Assets
Assets are what a company owns or something that's owed to the company. They include tangible items such as buildings, machinery, and equipment as well as intangibles such as accounts receivable, patents, or intellectual property.
The difference is its owner's or stockholders' equity if a business subtracts its liabilities from its assets. The relationship can be expressed like this:
Assets−Liabilities=Owner’s Equity
This accounting equation is commonly presented this way, however:
Assets=Liabilities+Equity
3). How are Current Liabilities different from Long-Term Non-Current Ones?
Companies segregate their liabilities by their time horizon for when they're due. Current liabilities are due within a year and are often paid using current assets. Non-current liabilities are due in more than one year.
4). What is an Asset?
An asset is a resource with economic value that an individual, a company, or a country owns or controls with the expectation that it will provide a future benefit.
An asset is a resource that is expected to provide a future benefit to its owner.
In the case of businesses, assets are reported on the company's balance sheet.
An asset may generate cash flow, reduce expenses, or improve sales, and it may be either tangible (like money, house…. etc.) or intangible (like a copyright).
5). Types of Assets
In corporate accounting, assets are reported on a company's balance sheet and can be broadly categorized into current (or short-term) assets, fixed assets, financial assets, and intangible assets.
a. Current Assets
Current assets are short-term economic resources that are expected to be converted into cash or consumed within one year. Current assets can include cash, and accounts receivable.
b. Fixed Assets
Fixed assets are resources with an expected life of greater than a year, such as equipment, and buildings. An accounting adjustment called depreciation is made for fixed assets as they age. It allocates the cost of the asset over time.
c. Financial Assets
Financial assets can include stocks, corporate and government bonds, and other types of securities. Unlike fixed assets, they tend to be liquid, and they are valued according to their current price on the relevant market.
d. Intangible Assets
Intangible assets are economic resources that have no physical presence. They include trademarks, copyrights, and goodwill. Similar to the depreciation process for fixed assets, intangible assets can be amortized over their useful life for accounting and tax purposes.
Exercise:
This is Homework to be submitted before 07.11.2024
Classify the following words as either: Asset(A), Liability(L); Shareholders Equity(SE); Revenue(Rev); Expenses(Exp); Dividends(Div) and if it is an asset or liability say whether it is Current (C) or Long-term (LT)
Long -term investment......(A) (LT)
Accounts receivable............(A) (C)
Rent revenue....................... (Rev)
Computer..................................(A) (LT)
Mortgage payable................(L) (LT)
Salaries payable......................(L) (C)
Cash............................................(A) (C)
Retained earnings..................(SE)
Accounts payable.......................(L) (C)
Car....................................................(A) (LT)
Income tax expense....................(Exp)
Inventory..........................................(A) (C)
Building............................................(A) (LT)
Land.................................................(A) (LT)
Common shares...........................(SE)
Bank loan payable.......................(L) (LT)