Assets & Liabilities

LIABILITY

LIABILITY: It refers to the amount which the firm owes to outsiders. But it does not include the amount owed to proprietors (owners). When a firm purchases goods on credit from someone, then the amount owing to that person is a liability. Likewise when a bank account is overdrawn, the amount owing to the bank (i.e. bank overdraft) is known as a liability. Other examples of liabilities are:- Bills Payable, Creditors, Unpaid wages, Loans etc.

Liabilities may be divided into two parts:

1.     Internal Liabilities

2.     External Liabilities

INTERNAL LIABILITIES: All amounts which a business entity has to pay to the proprietor or the owners are internal liabilities. For example, Capital, Accumulated Profits.

EXTERNAL LIABILITIES: All amounts which a business entity has to pay to the outsiders are known as external liabilities. For example, Creditors, Bills Payables, Loans etc.

Liabilities can be classified as under also:

Long Term Liabilities: These refer to those liabilities which fall due for payment in a relatively long period normally after more than one year. For example, Long Term Loans, Debentures etc. These are also called Fixed liabilities.

Short Term Liabilities: These refer to those liabilities which are to be paid in near future, normally within one year. For example, Bank Overdraft, Creditors, Outstanding Expenses, Short Term Loans etc. These are also called Current Liabilities.

 ASSETS

ASSETS: Anything which is in the possession or is the property of a business enterprise including the amounts due to it from others is called an asset. In other words, anything which will enable a business enterprise to get cash or a benefit in future is an asset. Examples:- Cash and Bank Balances, Stock, Furniture, Machinery, Land and Building etc.

Main characteristics of an asset:

1.     It must be valuable.

2.     It must be owned by the business.

3.     It must be acquired at a measurable money cost.

Assets may be classified into following categories:-

·        Fixed Assets

·        Current Assets

·        Tangible Assets

·        Intangible Assets

·        Liquid Assets

·        Fictitious or Nominal Assets

Fixed Assets: Those assets which are held for continued use in the business for the purpose of producing goods or services are called fixed assets. They are not for resale. Examples: Land & Building, Plant & Machinery, Motor Vehicles, Furniture etc.

Current Assets: Those assets which are meant for sale or which the management would want to convert into cash within one year are called Current Assets. Examples: Debtors, Stock, Bills Receivables etc. These assets are also termed as Short-lived or Active Assets. Current Assets are also known as Floating Assets or Circulating Assets as the amount and nature of such assets keeps changing continuously.

Tangible assets: They refer to those assets which can be seen and touched. In other words, which have a physical existence such as Land, Building, Plant, Machinery etc.

Intangible Assets: Those assets which do not have a physical existence and which cannot be seen or felt are intangible assets. Examples: Goodwill, Patents, Trade Marks etc. These are also valuable assets. They help the firm in earning profits as much as the tangible assets. Value of intangible assets is based on the benefit and facility available to the business from such assets.

Liquid Assets: These are those assets which are either in the form of cash or can be quickly converted into cash. Examples: Cash, Bills Receivable, Short Term Investments, Debtors, Accrued Income etc. In other words, if Prepaid Expenses and Closing Stock are excluded from Current Assets, the balance will be Liquid Assets.

Fictitious or Nominal Assets: These are the assets which cannot be realized in Cash or no further benefit can be derived from these assets. Example: Debit Balance of Profit & Loss A/c, Expenditure not yet written off etc. These assets are not really assets but are shown on the Assets side only for the purpose of transferring them to the Profit and Loss Account gradually over a period of time.