What is asset, liability and equity of a company?

Assets, liabilities and equity are elements of a company that refer to assets and collection rights, obligations and debts, and its capital and profits.

Assets, liabilities and equity are specific accounting terms used specifically in the balance sheet in order to publicize and allow to analyze the financial situation of a company.

In this article we will know the definition of assets, liabilities and equity, and the relationship that exists between these three elements.

In this article you will find:

  • What is the asset?
  • What is the liabilities?
  • What is heritage?
  • What is the relationship between assets, liabilities and equity?

What is the asset?

The asset is the set of assets and collection rights owned by a company, necessary to carry out its daily activities or operations.

Common examples of assets are the money the company has in its safe, the business premises where it operates, its machines and equipment, and the products it sells.

The assets of a company are classified as current assets and non-current assets.

Current active

Current assets (also called current assets) is the asset that can easily be converted into cash, or that the company expects to use, consume or sell in the short term, short term being understood as the term of one year.

Current assets are, for example, the products sold by the company, since these are expected to be sold in the short term, and thus be converted into cash, unlike what happens, for example, with its commercial premises, its machinery or its equipment.

Current assets in turn can be classified into:

  • Available : the money that the company has available, for example, in its safe or in a checking account in the bank.
  • Accounts receivable : the money customers owe the company for sales made on credit.
  • Non-commercial accounts receivable : the money that other debtors who are not clients owe the company for concepts not related to the company’s business.
  • Short-term investments : financial instruments, such as stocks and bonds, that the company expects to convert to cash within one year.
  • Stocks : the assets that the company owns destined to be used in its production process or for sale; for example, inputs or raw materials, products in process, and finished products or merchandise.

Non-current assets

Non-current assets (also called fixed assets) are assets that can hardly be converted into cash (it is not very liquid), or that the company expects to keep for a period of more than one year.

Non-current or fixed assets are, for example, the equipment that the company acquires to carry out its daily operations, since they are expected to remain in the company for a period of time greater than one year (unless the company is dedicated to the purchase and sale of these equipment, and buy them in order to sell them, in which case they would be current assets).

Non-current assets can be classified into:

  • Real Estate : includes buildings, land, commercial premises, offices, etc.
  • Machinery : the machines necessary to carry out the daily operations of the company.
  • Equipment : includes computers, printers, televisions, etc.
  • Transport vehicles : includes trucks, vans, cars, motorcycles, etc.
  • Furniture : includes shelves, desks, tables, chairs, etc.
  • Trademarks and patents : the trademarks and patents registered by the company.
  • Long-term investments : financial instruments, such as stocks and bonds, that the company expects to convert to cash in a term greater than one year.

What is the liabilities?

The liability is the set of obligations or debts that a company has with third parties.

Common examples of liabilities are the money the company owes its suppliers, and the debts it has pending with the banks.

A company’s liability is classified as current liabilities and non-current liabilities.

Current liabilities

Current liabilities (also called short-term liabilities) are the obligations or debts that the company has with a maturity less than or equal to one year; that is, you must pay within one year.

The current liabilities in turn can be classified into:

  • Accounts payable : the money the company owes its suppliers for purchases made on credit.
  • Non-commercial accounts payable : the money that the company owes to other creditors that are not suppliers for concepts not related to the company’s business.
  • Bank credits : the short-term debts that the company has with banks or other financial entities, generally for loans acquired.
  • Remuneration pending payment : wages, salaries and social benefits that the company has to pay its workers.
  • Taxes payable : the taxes or tributes that the company has to pay.

Non-current liabilities

Non-current liabilities (also called long-term liabilities) are the obligations or debts that the company has with a maturity greater than one year; that is, you must pay in a period of time greater than one year.

Non-current liabilities can be classified into:

  • Bank credits : the long-term debts that the company has with banks or other financial entities, generally for acquired loans.
  • Mortgages : mortgages that the company must pay in a period of time greater than one year.

What is heritage?

Equity (also called net worth) are the contributions made by the partners or shareholders of the company, plus the profits it generates.

The assets of a company are classified into:

  • Capital or share capital : the contributions made by the partners or shareholders of the company.
  • Retained earnings or reserves : earnings that are retained or accumulated in the company after paying dividends.
  • Profit for the year : earnings for the year before being distributed as dividends and destined to retained earnings.

What is the relationship between assets, liabilities and equity?

The relationship between the assets, liabilities and equity of a company is that, according to the basic accounting equation, in every company the total value of the asset is equal to the total value of the liability plus the total value of the equity.

Assets = Liabilities + Equity

This is because, in theory, all the assets of a company are financed either with third-party funds (liabilities) or with own funds (equity).

For example, if a company purchases a loan from the bank to buy a computer valued at $ 1,000, the purchase of the computer increases its assets (specifically its equipment) by $ 1,000, and the acquired loan increases its liabilities (specifically its debts with banks) also in US $ 1,000.

And if the company buys the computer with contributions from the partners, the purchase increases its assets (specifically its equipment) by US $ 1,000, and the contributions made by the partners increase its assets (specifically its capital) by US $ 1,000 as well.

In both cases the value of the asset remains equal to the value of the liability plus the value of the equity.

   
  PASSIVE
  (obligations and debts)
ACTIVE  
(assets and collection rights)  
  HERITAGE
  (capital and profits)
   

As mentioned, assets, liabilities and equity are specific accounting terms used specifically in the balance sheet in order to publicize and allow analysis of the financial situation of a company.

In general, a company is financially healthy when it has more assets than liabilities, and when it acquires debts (liabilities) to increase its assets (when it uses financial leverage), but it has enough assets to answer the debts.

To learn more about the assets, liabilities and equity of a company, and the relationship between them visit: What is a balance sheet and how to make one .

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