Assets and liabilities are one of the key concepts in accounting. However, knowledge of them is quite applicable in everyday life. The concept of assets and liabilities contributes to the proper formation and use of equity capital.
About what assets and liabilities are, many of our compatriots who are interested in improving their financial situation have learned from the writings of Robert Kiyosaki. Kiyosaki is an investor and educator, and his interpretation of these concepts certainly deserves attention. However, it is misleading to some readers.
Two definitions of assets and liabilities
There are two main definitions of assets and liabilities. One introduced Kiyosaki, and it is easy to access and simplicity. The second is used by people who are engaged not in enlightenment, but in business. Therefore, it may seem unprepared to the reader a bit heavy.
To begin with, we analyze the interpretation proposed by Kiyosaki. The American understands the asset as “everything that does the work for you and allows you to receive passive income without effort”, and the liabilities - as “everything, because of what you have to spend.” If you have managed to successfully invest in any progressive project, you get an asset - say, good stocks, which steadily grow in value. Passive, on the contrary, forces you to pay off - for example, for a car bought on credit. Agree, Kiyosaki explains quite understandably.
But not everything is so simple. Let us turn to the definition that is customary for accountants.
Assets and liabilities They are two parts of a balance sheet, in which all information related to the economic situation and commercial activity of a company is recorded.
In general, the balance sheet is essentially a table from which you can easily find out:
- what is owned by the company,
- who is the owner of this company
- what are her financial results
- what are the sources of its funds.
Information about the property is contained in the left part of the balance (in the asset). The assets include:
- working capital (funds on the current account, materials used in production, spare parts),
- non-current, or fixed capital (production halls, office premises, patent rights, intellectual property rights, trademark, know-how, etc.)
The right part (passive) is intended for sources of property.
- own funds of the company (share capital + retained earnings),
- involved funds.
Why is it generally accepted that liabilities are sources of assets? It's simple: the use of liabilities contributes to the increase in assets. The table of assets and liabilities is called “balance” because both parts ideally balance each other.
Let's give an example. When a certain enterprise receives a loan (suppose, 2 million rubles), two events occur:
- 1. These 2 million rubles arise in its accounts (which is recorded in the asset).
- 2. Those same 2 million are added to debts on loans (and this is reflected in the liability).
The International Financial Reporting System (IFRS) offers the following formula, which clearly demonstrates the "relationship" of assets with liabilities:
Equity + Liabilities = Liabilities = Assets
This formula, by the way, gives an idea of what capital is. According to her, capital is considered a share in the assets of an enterprise, which remains after deducting liabilities.
Types of assets
Information about the economic resources available to the company is reflected in the active accounts. How these funds are distributed can be found on the account balances.
Quantitative and qualitative characteristics of the property and its value at a particular point in time are recorded in the asset (left side of the balance sheet). Often the assets are called the entire property of the company. The form of the balance sheet adopted in Russia provides for the division of assets into two classes:
- 1.Negotiable, or those that are used to carry out the activities of the enterprise. These include:
- financial resources,
- raw materials, materials, spare parts, finished products,
- VAT on acquisitions,
- investments in securities (for short term),
- debt from individuals and legal entities,
- other assets. 2.Non-current - those assets that do not participate in the economic turnover. Among them:
- fixed assets
- intangible assets,
- investments for long term,
- products that are in the process of production.
Speaking of assets, it is necessary to note the following points:
- The use of assets gives the company the opportunity to obtain economic benefits.
- The event, which resulted in the possibility of obtaining benefits, has already happened.
- Net asset value is the difference between total assets and liabilities.
Types of liabilities
Passive accounts are designed to display the sources of funds. The balances in the accounts give an idea of the origin of such funds. All sources of funds can be denoted by the word "obligations".
Thus, the obligation refers to the company’s already existing debt by a certain time, resulting from certain operations. Repayment of obligations leads to the fact that assets are reduced - for example, due to the payment of money, the provision of services, the replacement of one obligation with another.
The liabilities include both own and borrowed capital. Own, in turn, is formed by the statutory and joint-stock.
Obligations can be:
- 1.Short term. These include:
- accounts payable, i.e. debts of the enterprise itself - for example, to its own employees,
- loan obligations that need to be repaid within a year,
- reserves for future expenses.
Assets and liabilities in the personal and family budget
Is it too much attention we pay to the disclosure of these concepts? - by no means! The fact is that, firstly, knowledge of the basics of accounting can be useful not only for a businessman, but also for any person who has his own savings and is leading a household. The presence of assets and liabilities is typical for personal and family budget. Understanding their essence contributes to the meaningful formation and distribution of "home" capital.
Secondly, many of our readers, striving for financial independence, are taking the first steps towards starting their own business. And knowledge of the key concepts of accounting does not hurt them exactly.
Now back to what we started with - namely, to the definitions given by Kiyosaki. How does his interpretation of the asset and liability match the “harsh reality”?
One of the main advantages of the interpretation proposed by this author is its accessibility. But one should not think that in the economy, even at home, everything should be “accessible” and simple. Simplification of concepts does not always lead to the desired results. Without economic literacy, you can make the wrong decision.
Therefore, in relation to domestic capital it is recommended to apply the traditional accounting approach, only slightly adapted.
According to him, it turns out that assets - this is all that a person has and what he applies. It doesn’t matter whether he spends his money or, on the contrary, earns income.
Liabilities but these are all debts (obligations) of a person. These include taxes in favor of the state, and gifts to employees for the New Year, as well as retained earnings.
We note, by the way, that distributed profit as such does not exist - it is converted into assets. And the profit that accumulates throughout a person’s life can be called capital.
What good is the above approach? Let's try to figure it out.
Present your family budget in the form of a balance sheet. Entries in the "Assets" column will be very different from those in the "Liabilities" column. You will see that it is impossible to confuse assets with liabilities.
Assets are real-life objects and objects (documents, wealth, etc.), while liabilities are something abstract. Liabilities (debts, overdue accounts, accumulated profits) are recorded on paper and exist in the memory in the mind, but they are intangible.
Kiyosaki did not write anything about the intangible: he, after all, focused on Americans who love specifics. But liabilities are just the things that cannot be touched. Therefore, the generally accepted definition of assets and liabilities, even if adapted, seems to us more accurate than the definition given by the American educator.
In conclusion, let us give our readers advice: do not neglect the theoretical foundations! If you plan to open your own business, knowledge of basic concepts will give you the opportunity to feel more confident.
Liabilities are divided into current liabilities (English current liabilities), long-term debts (English long-term debt) and long-term liabilities (English long-term liabilities). Current liabilities include liabilities due for payment in the following year. Long-term debts include long-term loans from financial institutions and long-term bonds placed on the financial market. Other long-term liabilities include liabilities to lessors, to employees and the government (deferred taxes) .
Obligations can have various types of classifications of obligations. One type of separation of obligations is the following division of obligations:
- liabilities (actual and actual liabilities),
According to the “Concept of accounting in a market economy of Russia” (approved by the Methodological Council for Accounting at the Ministry of Finance of the Russian Federation, the Presidential Council of the IPB of the Russian Federation on December 29, 1997) commitment the organization’s existing debt at the reporting date, which is a consequence of the completed projects of its economic activity and calculations for which should lead to an outflow of assets, is considered. Obligation may arise by virtue of the contract or legal rules, as well as the customs of business turnover.
Repayment of the obligation usually implies that the organization loses the corresponding assets to satisfy the claims of the other party. This can occur through the payment of cash or the transfer of other assets (provision of services). In addition, the redemption of the obligation may take the form of replacing the obligation of one type with another, converting the obligation into capital, or withdrawing claims from the creditor.
"Hidden" obligations organizations - loan, credit and other accounts payable of the organization to the budget, extrabudgetary funds, individuals and / or legal entities, recorded in the accounting (and / or tax) accounting, reflected in the balance sheet of the organization and taken into account when calculating the organization’s net assets or own funds, but virtually absent from the organization. Such obligations should have already been repaid or written off, but for some reason this did not happen. The presence of "hidden" obligations will not lead to the need to repay payables through the transfer (return, transfer of ownership or other alienation) of property, assets owned by the organization. Accounting for “hidden” liabilities is an overestimation of the value of an organization’s liabilities over liabilities that actually arose and are subject to cancellation in the process of conducting financial and economic activities. Identification and reflection in management accounting of “hidden” liabilities will lead to the need to adjust downward the individual elements of the organization’s liabilities, and, accordingly, will increase the estimated value of the net assets or own funds of the organization. Identifying, reflecting and accounting for “hidden” obligations (in management or accounting) does not really affect the actual position and financial and economic condition of the organization, but only reveals and reflects in accounting already received, but not found its timely reflection in accounting, management. or tax accounting related financial results.
“Hidden” obligations may include:
- the obligation to carry out the constant use of resources (or money) without obtaining adequate benefits, benefits.
- the obligation to carry out the constant use of resources (or money) aimed at social or charitable purposes.
- the presence of significant penalties provided in the contracts (subject to the early termination of these contracts), which the organization wishes to terminate in the near future,
- the existence of a contractual relationship for the supply of inventories, services, rent, etc. at prices higher than the average value on the market,
- the presence of consumed resources (costs of the organization), the period of reflection in accounting or the accrual of which has not yet come in accordance with the terms of the contract, accounting rules, etc.,
- availability of the status of a cultural monument of fixed assets owned or used by the organization,
- deferred tax liabilities (ITO), for organizations that do not account for them,
- issued guarantees or sureties in securing the fulfillment of obligations for their own obligations and obligations of third parties (to the loan agreement, to the agreement for the supply of goods, etc.),
- the obligation to repay the obligations of certain categories of subsidiaries or affiliates,
- the presence of unnecessary, inefficient property, property rights (property does not bring, cannot and will not bring economic or other benefits in the foreseeable future), exemption from which will lead to additional costs that the owner must incur,
- other "hidden" obligations.
"Imaginary" obligations organizations - loan, credit and other accounts payable of the organization to the budget, extrabudgetary funds, individuals and / or legal entities, recorded in the accounting (and / or tax) accounting, reflected in the balance sheet of the organization and taken into account when calculating the organization’s net assets or own funds, but virtually absent from the organization. Such obligations should have already been repaid or written off, but for some reason this did not happen. The presence of "imaginary" obligations will not lead to the need to repay payables through the transfer (return, transfer of property rights or other alienation) of property, assets owned by the organization. Accounting for “imaginary” liabilities is an overestimation of the value of an organization’s liabilities over obligations that have actually arisen and are subject to cancellation in the process of conducting financial and economic activities. Identification and reflection in management accounting of “imaginary” liabilities will lead to the need to adjust downwards certain elements of the organization’s liabilities, and, accordingly, will lead to an increase in the estimated value of the net assets or own funds of the organization.
Identifying, reflecting and accounting for “imaginary” obligations (in management or accounting) does not really affect the actual position and financial and economic condition of the organization, but only reveals and reflects in accounting already received, but not found its timely reflection in accounting, management. or tax accounting related financial results. The identification of “imaginary” obligations is based on the identification of liabilities reflected in the accounting records, which, by their economic nature, are not obligations and cannot be canceled in accordance with the generally established procedure.
“Imaginary” obligations may include:
- loans received from the owners (co-owners) of the legal entity,
- accounts payable with expired statute of limitations, payables to the bankrupt creditor,
- the deferred tax liability (IT), which will not be taken into account in the foreseeable future as an increase in the current income tax,
- provisions for impairment of various assets, reserves for future expenses,
Assets as an element of accounting
These are the resources of the organization that it uses in the course of economic activity, the use of which in the future implies profit.
The assets always show the value of all tangible, intangible and monetary values of the company, as well as property powers, their maintenance, placement and investment.
Examples of enterprise assets:
- Fixed assets
- Raw materials, materials, semi-finished products,
- Finished products.
All this property which the enterprise will use in the course of the functioning for the purpose of receiving economic profit.
The form of the functional composition are divided into tangible, intangible and financial.
- Material - called objects that are in real form (they can be touched and felt). These include the company's buildings and facilities, technical equipment and materials.
- Под нематериальными принято подразумевать ту часть производства предприятия, которая материального воплощения не имеет. Это может быть торговая марка либо же патент, которые тоже берут участие в делопроизводстве организации.
- Financial means various financial instruments of the company, whether they are cash accounts in any currency, receivables or other economic investments with different terms.
By the nature of participation in the production activities of the enterprise, the assets are divided into current (current) and non-negotiable assets.
- Negotiable - are used to complete the company's operating processes and are fully consumed in one full production cycle (no more than 1 year)
- Non-current — they take part in clerical work more than once, and are used exactly until the moment when all resources are transferred to the form of products.
By the type of capital used assets are:
- Gross, that is, formed on the basis of equity and debt capital.
- Net, which implies the formation of assets only at the expense of the company's own capital.
By right of ownership of assets, they are divided into leased and owned.
They are also classified by liquidity, that is, the speed of their transformation into a financial equivalent. In accordance with a similar system, among the resources are allocated:
- Absolute liquidity assets,
- High liquidity
- Weakly liquid,
Long-term assets include land, various types of transport, technical equipment, household and industrial equipment, and other company supplies. Assets of this type are recorded at their acquisition cost less accumulated depreciation, or, in the case of land plots and buildings, at a price determined by a professional expert.
Liabilities of the enterprise and their participation in production activities
Under the liabilities of the company imply the obligations assumed by the company, and its sources of funding (include own and borrowed capital, as well as funds attracted to the organization for some reason).
With any form of ownership, except for the state, the company's own capital contains in its structure a statutory fund, shares, shares in various economic societies and friendly associations, proceeds from the sale of company shares (primary and additional), accumulated reserves, and public finances in the organization.
For state-owned enterprises, the structure includes state financial resources and deferred deductions from revenues.
The structure of borrowed funds consists of the capital for which this or that property is pledged, and regardless of whether the mortgage is issued or not, loans received at banking institutions, bills of various types.
What are the assets of the enterprise:
- Fixed assets and production assets
- Movable and immovable property
- Inventory items,
What concerns the liabilities of the enterprise:
- Authorized capital,
- Credits and loans from other individuals and legal entities
- Retained earnings,
- Accounts payable.
The difference between the liability and the asset
The difference is their different functions, each of these elements of the balance sheet illuminate its side of the office. However, they are closely interrelated.
When the asset is increased, the liability is necessarily increased by the same amount, that is, the debt obligation of the company increases. The same principle also applies to liabilities.
For example, in the event that a new loan agreement is concluded with a bank, assets automatically increase, as new finances enter the organization, and at the same time the enterprise has a liability - a debt to the bank. At the moment when the organization repays this loan, there will be a decrease in assets, as the amount of funds in the company’s account will decrease, and the liability will also decrease, as the debt to the bank will disappear.
It is from this principle that equality of liabilities and assets of an enterprise follows. Any change in the former entails a change in the latter by the same amount and vice versa.
What are enterprise assets?
Those objects that the enterprise owns and which it uses in economic activity for the purpose of making a profit are called assets. That is, this is all the property of the enterprise with which the company plans to make a profit.
- The machine is the main tool used in production activities for the creation of products and their subsequent resale.
- Securities are also an asset, since it is planned to make a profit with them in the future.
- Raw materials, materials - likewise, are used in production for further profit.
- Goods - purchased for the purpose of resale and receipt of revenue.
- Finished products are similar.
- Accounts receivable - the debt to the enterprise of other contractors, that is, these are the funds that the organization plans to receive in the future, that is, also the economic benefit of the enterprise.
- Cash - I think, and so it is clear that this is an asset that the company will invest in the future in the purchase of goods, production, etc. for profit.
- Warehouse - is used to store goods that the organization then sells for the purpose of profit.
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Assets are closely related to liabilities. If the first changes, then, respectively, the second changes as well. Moreover, with an increase in assets, liabilities also increase by the same amount. Similarly, with a decrease. That is why in the balance sheet the total value of assets should be equal to the total value of liabilities.
To track the process of simultaneous changes in both quantities, as well as to confirm the equality of liabilities and assets, consider an example.
The organization buys goods for sale at 100,000 rubles. The product will be an asset of the company, as a result of the purchase of goods, the assets of the company increased by 100,000 rubles. (item appeared in stock). At the same time, the company's payables to the supplier of goods in the amount of 100,000 rubles appeared, this debt is the company's liabilities, that is, as a result of the purchase, liabilities increased by 100,000 rubles. The example confirms the words above.
Let's continue our example a little: the company pays the debt to the supplier in the amount of the same 100,000 rubles. As a result of this business transaction, the amount of money in the organization’s settlement account decreased (that is, assets decreased by 100,000 rubles), while the amount of payables to the supplier decreased (that is, liabilities decreased by all the same 100,000 rubles). Again, the rule is confirmed: with a decrease in assets, the liabilities also decreased by the same amount.
The total value of assets in an enterprise is always equal to the total value of liabilities.
If at the end of the year, the balance sheet revealed discrepancies in the figures, then somewhere there was a mistake. Most likely, some kind of business transaction was not correctly reflected, that is, the wiring was not correctly made, and the accounts for this wiring were not correctly selected.
Next, we will deal with the accounts - what is it, for what and how it is used - read on. Here we will get acquainted with the Chart of Accounts and decide whether to teach it and how to do it correctly.
Liability can become an asset and vice versa.
For example, people moved out of your rented apartment. Overnight, you become the owner of the apartment, and the burden of its costs falls on you. This payment for an apartment, repairs, heating, taxes and all sorts of bills that make you poorer. But as soon as someone rents this apartment, it will again become a source of income - an asset. The conclusion is self - liabilities make us poorer, and assets richer. Wealthy, rich people are trying to get rid of liabilities and acquire assets.
For middle class people there is an equality of considerable expenses and a considerable amount of money earned. Getting used to a decent standard of living, these people have a lot of liabilities - cars, houses, villas, jewelry. Often acquiring these liabilities, people go into debt. The greater their profit, the greater the expense. The middle class spends their money to cover their debts. The more they earn, the more they spend.
Example. There was a desire to buy a new car. You buy a property, rent it out and only then a car. It's simple - passive income is created using an asset.
Liabilities and assets. Balance
It is impossible to do without liabilities. Our world around consists of liabilities. We live in a house, drive our own car, use all the blessings of life. Understanding this, it is necessary to find a balance, to strive to ensure that the profit received from the creation of assets exceeds the costs by several times.
Then evaluate your assets. What and how the monthly income. Revenues may be several. They make it possible to achieve financial freedom, when money is already working for a person, and not for him. Buying assets, you are no longer working for money. You can of course keep the liabilities as a country villa, but this is only if you are a billionaire and own factories, oil rigs, real estate and a yacht.
Step by step draw up an action plan to increase revenue and reduce costs. Acquire assets only when there is free money from the work of assets. This may be a percentage of the investment, income from real estate, profit from the business. It is necessary every second to clearly understand what your actions lead to - a decrease or increase in well-being.
Asset and liability of the balance sheet for "dummies"
Participation in the business process of the enterprise assets and liabilities continuously, they are always present in it, sometimes only changing its composition and form of value. To understand the assets and liabilities, you first need to get acquainted with the balance sheet.
In domestic accounting practice, balance is a way of summarizing the assets and liabilities of an enterprise in monetary terms. The balance sheet characterizes the financial position of the enterprise in monetary terms at the reporting date.
The balance of assets and liabilities is called planned. It is developed on the basis of the plan for the organization’s revenues and expenditures, the plan for financial profits and expenses, the use of investments, etc.
The main tasks of the balance sheet are:
- formation of high realizability of the organization and conditions guaranteeing it,
- planned calculations of the organization's creditworthiness, as well as their reflection on the balance,
- arguing the conditions of the organization’s capitalization and growth of its value.
In other words, a planned balance is a place where assets and liabilities are stored. The balance of assets and liabilities is depicted in the form of a table in which assets are located on the left and liabilities on the right.
The total amount of all data on the left side should be equal to the amount of data on the right side. The indispensable equality of assets and liabilities in the balance sheet is an important rule that should not be forgotten. If equal values are not displayed, it means that an error was made in accounting, which must be found.
Inventory of enterprise liabilities
In order for a planned balance sheet to be drawn up correctly, it is necessary to clearly understand what an asset and a liability are, and for this, they should be considered separately.
The assets of an enterprise are the values under control, which must necessarily bring income in the future. In the case of non-profit organizations, the second part is not taken into account.
Assets may include: fixed assets (OS), finished product, product, etc.
There are the following types of assets:
Tangible include assets that exist in physical form (finished products, equipment, etc.). Accordingly, intangible assets will not be touched, most often, these are patents, trademarks and so on. Financial assets include cash investments, accounts, accounts receivable.
What do the assets of the enterprise include?
According to their characteristics, assets are also divided into negotiable and non-negotiable:
- Negotiable - cash and cash equivalents that are not limited in use and others intended to be sold within 12 months from the balance sheet date or during the course of the operating cycle. Current assets can be: cash, financial short-term investments, receivables (if the maturity is not more than a year), production stocks, value-added tax on purchased values, etc.
- Non-current (non-current) - assets that have a useful life of more than 12 months or more than the term of the operating cycle. These may include fixed assets, long-term financial investments, intangible assets, etc.
By type of use, assets can be gross (obtained on the basis of not only equity, but also borrowed capital) and net (formed solely on their own investments).
On the balance sheet, you can also find assets that actually do not exist. The so-called fictitious assets are often used for fraud, delayed write-off of assets.
There are also "hidden" assets. They are not reflected on the balance sheet of the enterprise. Such assets may include:
- organizational costs when creating an organization,
- license fees,
- written off fixed assets, worth less than 40,000 rubles.,
- improvement and modernization of fixed assets
- library fund
- marketing research results
- long-term contracts,
- other "hidden" assets.
Liquid assets are assets that can be quickly and cost-effectively converted into cash.
Another type of asset is called imaginary. “Imaginary” assets are reflected in the balance sheet of the enterprise, but they are virtually absent. Most often, such assets have been written off for some time, but for some reason they are not written off. The fact of “owning” such assets has no financial benefit, either now or in the future. Or such a benefit may exist, but its size is negligible compared to the cost of maintaining the asset.
To the "imaginary" assets include:
- unrecorded receivables that have no chance of repayment,
- unnecessary or excessive modernization of fixed assets
- unsuitable materials
- unwritten value of fixed assets more unfit for use,
- other ineffective assets.
Assets and liabilities of the balance sheet. Conclusion
The asset and liability balance of an enterprise are the components of any financial system. They are components of the balance sheet, and therefore assets and liabilities are always equal, because it is impossible to acquire anything for an amount greater than is available.
The minimum change in one part of the balance immediately brings changes to the other. So, for proper accounting of assets from liabilities, learning how to separate is extremely important.