Assets and Liabilities of Business

Read this article to learn about the classification of assets and liabilities.

Classification of Assets:

The resources which are acquired by the business either from the funds made available by the owners or by the creditors of the business are called Assets. All rights of proprietor which an enterprise owns are included in this e.g., cash, cash at bank, investments, stock, bills receivable, debtors, land & building, plant & machinery, trade marks, patent right, etc.

The various categories which all the assets of a business enterprise can be classified are:

(i) Current Assets;

(ii) Investments;

(iii) Fixed Assets or Tangible Long-term Assets

(iv) Intangible Assets

(v) Wasting Assets and

(vi) Fictitious Assets.

(i) Current and Liquid Assets:

Current assets are those assets which can be converted into cash within normal business operations say 12 months. For example, cash and other resources such as stock of raw material, work in progress, finished goods, bills receivable, debtors, short term investments and prepaid expenses etc.

Liquid assets are cash in hand, cash at bank and all those current assets which can be converted into cash immediately or within a very short span say 3 months. Debtors and bills receivable are some other examples of liquid assets.

(ii) Investments:

Investments represent the amount invested in shares, debentures or some other securities for more than one year. In this context, it is worth mentioning that here the term ‘investment’ should not be confused with the term ‘marketable securities’ as marketable securities is a part of current assets.

(iii) Fixed Assets or Tangible Long-Term Assets:

Some assets are acquired by the business enterprises not for resale but for retaining them for many accounting periods for the purpose of carrying out of business activities. These assets are termed as Fixed Assets and sometimes these are also termed as ‘Fixed Block’ or ‘Block Capital’. For example, land & building, plant & machinery, furniture & fixtures, etc.

(iv) Intangible Assets:

The assets which cannot be seen or touched are called intangible assets. Though these assets do not have physical existence even then they play an important role in the business. A few examples of such assets are: goodwill, trademarks, copyrights, patents, etc.

(v) Wasting Assets:

Wasting assets are those assets which are gradually exhausted or consumed over a period of time. For example, mines, oil wells and quarries etc.

(vi) Fictitious Assets:

These are not assets at all, because the basic qualification for becoming the asset viz., rights of properties which a business enterprise owns is absent here and these items are not represented by anything concrete. These are to be shown in the balance sheet on the assets side simply because of the fact that items of some losses or expenses are yet to be written off through profit and loss account. For example: preliminary expenses, deferred revenue expenditure and debit balance of profit and loss account etc.

Classification of Liabilities:

Based on separate entity concept, all claims against the enterprise are mentioned as liabilities. The owner’s and the outsider’s claims both are termed together as equity i.e. owner’s equity and outsider’s equity respectively.

In this context, liabilities can be divided into following categories:

(i) Current Liabilities or Short-term Liabilities

(ii) Fixed Liabilities or Long-term Liabilities

(iii) Contingent Liabilities

(iv) Capital or Owner’s Equity

(i) Current Liabilities or Short-Term Liabilities:

Some liabilities are paid either out of the current assets or by creating new current assets and are payable within a period of one year from the date of the Balance Sheet. These liabilities are termed as current liabilities.

Following are some of the important items of current liabilities:

(a) Accounts Payable i.e. bills payable and trade creditors.

(b) Outstanding expenses i.e. the payment which has not been made by the business enterprise for the services it has availed.

(c) Bank overdraft i.e. the money overdrawn from the bank.

(d) Short term loan i.e. the loan which the firm takes from banks and other sources and has to be paid back within one year of the preparation of the Balance Sheet.

(e) Income received in advance i.e. the amount received by the business enterprise for the services to be provided or goods to be supplied in near future.

(ii) Fixed Liabilities or Long-Term Liabilities:

These are usually payable after one year of the date of the Balance Sheet. Long term loans in the shape of secured loan or unsecured loan etc. fall under this category.

(iii) Contingent Liabilities:

Contingent liabilities are those liabilities which are not certain at the time of preparing balance sheet. They may occur or may not occur. They may occur on the happening of some event and that event itself is not certain as yet.

For example:

(a) Liability in respect of bill discounted;

(b) Claim against the business enterprise not acknowledged as debt etc.

(iv) Capital or Owner’s Equity:

Capital is the money or money’s worth contributed by the entrepreneur to the business enterprise to enable the latter to operate its functions. At any moment of time it is equal to the net assets of the business enterprise and equal to the difference between assets and liabilities.