As a small business owner, there are times when you need to take certain decisions without massive inputs from your small business accountants. I have curated all my accounting 101 articles just to provide concise yet, comprehensive information for those aspiring to become accountants in the above linked article.
In this article on what are assets and liabilities in accounting, I will be discussing in a non-technical manner accounting basics for non-accountant business owners as it relates to assets and liabilities.
Caveat!!! The contents of this article may provoke some people into challenging my qualifications. Well, please note that this article is written for non-accountants to help them understand what assets and liabilities are and not to necessarily comply with technical accounting definition terms or terminologies. That said, lets dive back into the business of the day which is to provide an understanding of what assets and liabilities are to non-accountant business owners or business managers.
What are assets?
In common English, assets are those resources with potential to bring in future economic benefits that are controlled by an individual or a business entity due to past or current actions. Notice that ownership is not mentioned here, rather control is.
An asset according to the Oxford Dictionary of Accounting is an ‘object, tangible and intangible that is of value to its possessor’
Three (3) features of an assets
- Valuable and have the potential to bring in economic value: for any resource controlled to be classed as an asset, it must have the potential to bring in economic value to the controller. Am sorry to disappoint you here but those expensive private jets and private Yacht you bought just for the sake of buying them may not be classed as an asset. You may argue that they have the potential to bring in economic value but those argument of yours may not hold as you are probably not in the business of renting out those objects. Yeah, I heard someone saying ‘but I can sell them, until then they are not an asset to you, period’. Thinking of assets in this light resonates with the principles of profit first where it is argued that organizations should think in terms of profit before any other thing.
- In good working condition: for an object to be able to bring in economic inflow, it must be in good working condition. Those cars that are parked in your garage with faults of any kind cannot be classed as an asset in this our school of thoughts. Fix them and put them back to use if you want to still carry them as assets in your accounting records – also from your fixed assets register. After all, they say that dead men don’t count, for they are thrown into the sea for…!! What this means is that assets can erode in value if not maintained.
- Monetarily quantifiable: why would you call an item an asset when you cannot attach monetary value to it? You can simply adopt any of these valuation techniques to establish a value for resources that were not expressly bought – if its impossible to do, then they are not assets. A lot of toxic resources that have repeatedly led to major economic meltdown would not exist if this idea is implemented – accounting standard producers and regulators, please take note!
How to acquire assets
Assets are acquired through these two mediums briefly discussed below:
- Giving out value: the most common way of acquiring an asset is to give something of value in exchange.
- Gifting: the other means of acquiring an asset is when it is gifted to an individual or entity
What are liabilities?
Liabilities for the purpose of fitting into the theme of our discussion are those economic outflow pipes that exists in a business entity or in the life of an individual. This is to say that objects owned or controlled by us that takes out more economic value than it brings in (directly or indirect) is nothing but a liability. Let’s see what accountants call liabilities by referencing the accounting dictionary.
Oxford Dictionary of Accounting defines a liability as ‘an obligation to transfer economic benefits (generally money) as a result of past transactions.’
In accounting, we have six major forms of liabilities as follows:
- current liabilities
- long term liabilities and
- contingent liabilities
- deferred liabilities
- secured liabilities
- unsecured liabilities
Features of liabilities
- Presence of obligation
- Sucks more resources than it brings in
- Potential litigation
I am sure that going forward you will no longer be in doubt of what constitutes an asset or a liability after reading this accounting blog post on what are assets and liabilities.