Assets

Assets are items of value to the organization that can be given a monetary value. Assets can be divided into several different types: current and non-current, tangible and intangible.

Current assets are items whose value is expected to be used up, or turned over, within 12 months. Examples include bank savings, cash on hand, accounts receivable, pre-paid expenses, and stock (inventory.)

Non-current assets are those items that have an expected life of three to five plus years. These include large physical items such as buildings, land, machinery, vehicles, furniture, fixtures and fittings.

Intangible items are also included here. Intangible items are things of worth that have no physical substance. Examples include goodwill, trademarks, copyright and patents. A good name or reputation or an easily identifiable logo obviously have worth – but how do you value in a dollar terms something like good product design, a creative staff or reputation? Nevertheless, intangible assets are a resource that the firm owns and must be recorded in the accounts.

Liabilities

Liabilities are items of debt owed to other organizations (like suppliers or the banks) and include loans, accounts due to be paid by the business, mortgages, credit card debt and accumulated expenses. The business will divide the liabilities into current and non-current items.

Current liabilities are those in which the debt is expected to be repaid in the short term (12 months or less) and include bank overdrafts, credit card debts, accounts payable and accrued expenses.

Non-current liabilities are long-term debt items such as mortgages, leases, debentures and retirement benefit funds.

Owners Equity

The owners give business money in order for it to acquire resources and begin operating. This money is called ‘capital’. As the business operates it should start to cover its costs and then earn a profit. The business can hold or retain these profits in order to target money for a particular project or it may put money into ‘reserves’ for distribution later. The business could also choose to repay the owners who invested their money in the business at the outset.

Over time a successful business will have its owners equity amount increase in value. This means that the owners claim on the business will also increase. This is the owners reward for risking their money – and is also the reason why people invest in the stock market long term.

Owner’s equity is considered to be a liability from the pint of view of the business because it is a type of debt the business carries.

Suggested Reading:
+ Voluntary and Involuntary Cessation and Business Failure
+ Marketing Plan, Market Analysis and Sales Forecasting In A Business Plan
+ Types of Business Ownership, Their Advantages and Disadvantages

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Tags: Assets, Liabilities, Owners Equity