The concept of assets and liabilities of an organization

Concept and classification of assets

Assets are the property of an enterprise that should bring profit in the future. In other words, these are financial investments that create constant passive income for the asset holder and increase their value over time. Assets are classified:

1. By form of functioning: material: land, structures, finished products, equipment;
2. intangible: licenses, copyrights, patents, trademark;
3. financial: cash deposits, accounts, debts from individuals and legal entities.

In addition to the main types, there are “hidden” and “imaginary” assets. “Hidden” assets are not reflected when preparing the balance sheet. These may be organizational expenses when creating an enterprise, costs for acquiring a license, training and certification of personnel, improvement of equipment, underestimated residual value of fixed assets and intangible assets due to the use of various methods of depreciation.

“Imaginary” assets, although reflected on the organization’s balance sheet, are in fact absent. It is impossible to obtain significant financial benefits from owning “imaginary” assets, either in the present or in the future. Usually these are funds that have already been written off for a certain time, but for some reason remain not written off. For example, unwritten-off unusable and damaged materials or expired accounts payable.

According to the classification of IFRS (international financial reporting standards), there is another type of assets - excess. These include funds that are not currently needed for the main activities of the organization, for example, an excess amount of equipment in a construction company.

Table of potential investments

In addition to the usual sources of income, there are non-standard assets. These can be content sites, YouTube channels, promoted Instagram profiles, VKontakte public pages, photo stocks.

Passives and their varieties

Unlike an asset, a liability is the source of the formation of these assets - capital, as well as reserves. Liabilities also include obligations to the budget and creditors, for example a bank or supplier.

Liabilities include:

• taxes;
• mortgage;
• consumer loans;
• borrowed funds (IOUs, checks, bills, letters of credit);
• movable and immovable property (apartment, car, equipment).

An apartment is one of the controversial points when dividing property into assets and liabilities, since it can fall into two categories at once. For example, renting out an apartment implies receiving passive income, and accordingly is classified as an asset. If the owner personally moves into the apartment or lets his relatives there free of charge, in this case the apartment will be in the role of a liability.

In the production sector, a liability reflects the obligations that an organization has undertaken in the course of doing business. Paying off liabilities results in a decrease in assets. This could be the payment of funds, the provision of services, or the replacement of one obligation with another. Obligations are:

• short-term - current liabilities that must be repaid in the next year from the date of drawing up the balance sheet. This includes accounts payable of the organization itself, for example, debts to employees, lessors, suppliers of raw materials and equipment;
• long-term – financial obligations that require partial repayment over a long period of time. These include deferred liabilities for loans and credits received for a period of more than one year.

All liabilities of the organization are classified into the following categories:

1. Imaginary liabilities. They are reflected in tax or accounting records on a certain date to calculate the exact value of net assets, and in fact they are repaid. Timely identification of imaginary liabilities will help prevent double payment, that is, it will preserve the company’s working capital without reducing its value.
2. Hidden liabilities are obligations that are actually absent, but, nevertheless, are reflected in the structure of credit, tax and off-budget payments. They can arise when drawing up a balance sheet due to untimely write-off of credit and tax debts in accounting.
3. Actual - liabilities that actually exist and are reflected in the balance sheet. The maturity of these liabilities is determined by the date of their repayment, specified in the drawn up agreement. When fulfilling obligations on actual liabilities, the organization always loses part of its own assets. This can be finished products, fixed assets or working capital.

Liabilities - as a component of the balance sheet

Liabilities are the totality of all obligations of an enterprise. Liabilities reflect the sources of formation of all funds available to the company. Thus, assets can be called the property of the company, and liabilities can be called the funds from which this property was formed. Liabilities are divided into current and long-term obligations of the company. Current responsibility

, similar to current assets, exist only within one production cycle.
They are listed higher than long-term liabilities on the balance sheet. Long-term liabilities
of a company include debt that is not payable in the current year, i.e. existing longer than one production cycle. The difference between total assets and liabilities is the owner's equity. This value shows how much capital the owner will have if the company sells all its assets and uses the money to pay off its debts. The company's assets and liabilities must always be in balance. These indicators are displayed in the company's balance sheet, which is compiled for each specific reporting period.

Balance sheet

The balance sheet is the most important form of corporate reporting, characterizing the financial position of an organization for a certain period of time. Balance sheets are submitted to the tax authorities. Banks study such reports to assess the creditworthiness of the organization, and for shareholders they serve as a financial indicator of the work performed by management.

The balance sheet consists of two sections: assets and liabilities. Although these two sections are different, they are still closely related to each other. The slightest changes in one section will affect the other section. Therefore, the total amount of all components of the balance sheet must be the same, that is, in the end, assets and liabilities must always be equal.

The balance sheet is the main source of information for analyzing the production activities of an organization. The planned balance sheet is compiled on the basis of information about all financial flows of the company (including those expressed in foreign currency). It is depicted in the form of a table, where assets are on the left side and liabilities are on the right.

Video on the topic:

What are the net assets of an enterprise

In simple terms, NAV (from English netassets) is the difference between the total assets and liabilities of the company. Otherwise, it is property that is covered within the company's equity.

Alarm bell if this value is in the negative zone. Then the value of debts exceeds the sum of all assets.

CA and legislation

By law, if this indicator falls below a certain level, the company does not have the right to pay dividends for the reporting period.

The minimum acceptable threshold is determined as the size of the authorized capital and reserve fund. Preferred shares are also accounted for as the difference between their par value and liquidation value.

Calculation formula

The formula for calculating the NA is as follows:

Types of assets and what they include

It's time to look a little deeper at the structure of the balance sheet.

Non-current include the following subsections on the balance sheet:

• intangible assets;
• Finnish investments (more than a year);
• fixed assets;
• deferred tax liabilities.

The negotiables form the following sections:

• stocks;
• receivable;
• Finnish investments (less than a year);
• cash and equivalents.

This is an incomplete list; it may still be supplemented by some articles depending on the specifics of the activity, etc.

How are the assets and liabilities of the balance sheet formed?

Here I will briefly outline the main relationships when forming a balance:

1. Assets = Liabilities = (equity + liabilities).
2. Assets – liabilities = equity.

These accounting rules must always be followed.

Personal budget accounting

Assets are a positive cash flow that multiplies capital. Liabilities are negative cash flows that take cash away from equity. In simple and accessible language, an asset is property, a liability is the source of this property. It is necessary to strive to ensure that the income received from assets exceeds the expenses on liabilities. To do this you need:

1. Determine the size of your own liabilities, that is, monthly expenses and current needs.
2. Distribute expenses. Refuse unnecessary entertainment (restaurants, theaters, clubs) and the purchase of expensive things.
3. Determine your own assets with the highest return, that is, everything that brings profit.
4. Compare the difference between assets and liabilities. Successful people argue that there should be more assets than liabilities. If they are in equal proportions, the person will balance at the same level.

Only by correctly distributing assets and liabilities can one achieve material well-being. To put it most simply, assets are everything that generates income, that is, they are positive cash flows that increase capital. Liabilities are everything that money is spent on, negative cash flows, in other words, expenses.

What are assets and liabilities

Assets are property owned by a company at the reporting date. Using this property, the company carries out its activities and tries to make a profit (the left side of the balance sheet).

Liabilities are the economic means through which the company's assets are formed (the right side of the balance sheet).

Difference between liabilities and assets

To explain the difference and establish the correct cause-and-effect relationship, I will give a small example.

A company buys a machine for its activities for 100 rubles. Now the machine is the property of the company and is reflected on the left side of the balance sheet with a valuation of 100 rubles. At the same time, in order to buy equipment, the company took out a loan of 100 rubles. This is a liability and is reflected in the corresponding place on the right side of the balance sheet.

Are own shares an asset or a liability?

To answer this question, you should use the following accounting logic.

The issue of shares or other securities is the raising of funds with which it is possible to purchase property involved in the activities of the organization. This means that this is a source of funds; accordingly, own shares are a liability and are reflected as the company’s capital on the right side of the balance sheet.

Interaction of assets and liabilities

Liabilities are the sources from which the company’s property is formed. Therefore, in accounting there is an absolute rule that states that “LIABILITIES = ASSETS.”

Let me give you a couple more easy examples.

The company has funds contributed by its founders, i.e. capital (this is a liability) in the amount of 100 rubles. She buys a building (asset) worth 50 rubles with them. In this case, the balance will look like this: Liabilities = 100 rubles. Assets = 50 rub. Building and 50 rubles. - These are available funds.

Next, the company decided to purchase goods worth 100 rubles, but it did not have enough money, so it took out a loan of 50 rubles. The balance has changed: now the organization’s liabilities include 100 rubles. equity and 50 borrowed funds.

On the left side of the company’s balance sheet, a building purchased for 50 rubles remained, and goods worth 100 rubles appeared. The company has no free cash left. But the balance has not changed: 150 rubles. = 150 rub.

Assets and liabilities in financial statements

All information about the structure of the company is contained in such a type of reporting as the balance sheet. It is not filled out in free form, but has certain rules and structure.

Assets include two forms:

• non-current;
• negotiable.

Liabilities are divided into:

• equity;
• Short-term liabilities;
• long term duties.

Assets and liabilities according to Kiyosaki

Robert Kiyosaki is the bestselling author of Rich Dad Poor Dad. He offers his own system of grading property elements. His books have sold millions of copies, and his lectures attract (or have attracted) huge numbers of listeners.

Therefore, people often come across this information and begin to think that in accounting and when reading reports they can use the method he proposed. However, it is not.

Its definition rules do not apply to accounting; their meaning is as follows:

• an asset is anything that generates income;
• a liability is something that requires investment.

And the main idea is to increase the number of the former and reduce the number of the latter.

Industrial use

Modern economists and investors interpret the concepts of asset and liability in two ways. The first interpretation defines traditional economic concepts from the field of accounting. The second is used in connection with the development of the topic of personal capital management. Assets and liabilities are everything that forms a company's balance sheet. Company property in any form is considered an asset; liabilities are debt obligations.

Any intangible and tangible property that an enterprise has, as well as rights to property, are assets of the company. Assets are any property of the enterprise, liabilities are the funds at the expense of which the formation of property is carried out. Liabilities are considered to be the capital of an enterprise:

• joint stock;
• borrowed;
• statutory;
• credit.

The assets of the enterprise are classified according to:

1. Form of participation in the production process (current and non-current).
2. The nature of the functioning (financial, intangible, material).
3. Ownership rights (own, leased).
4. Source of formation (net, gross).
5. Liquidity.

Assets and liabilities reflect the company's balance sheet, which is prepared for a specific period. Balance sheet equilibrium is considered to be their equality. The first ones are arranged in the balance sheet according to increasing liquidity, and the second ones - according to the urgency of involvement in turnover.

Assets – as a component of the balance sheet

Assets are resources that are controlled by an enterprise as a result of past events, the use of which in the future will lead to economic benefits. Assets reflect in monetary terms all tangible, intangible and monetary values, as well as property rights in terms of their composition, placement and/or investment. Based on the form of functioning, they distinguish between tangible and intangible assets, as well as financial assets. Tangible assets are objects that have a material form (buildings and structures, equipment, materials, etc.). Intangible assets do not have a tangible (physical) form (trademark, patent, etc.), but they also take part in the production process carried out by the company. Financial assets are different financial instruments that belong to the company (monetary assets in different currencies, accounts receivable, financial investments with different maturities).

Asset classification

Based on the nature of participation in the production process, current (current) and non-current assets are distinguished. Current assets

are aimed at servicing the company's operating activities and are completely consumed in one production cycle (no more than 1 year).

Fixed assets

can participate in production processes many times, that is, in several production cycles. Non-current assets are used until their value is fully transferred to manufactured products. In addition, assets are divided into:

• gross (formed from own and borrowed capital)
• and pure (formed only from own capital), depending on the sources of formation.

Assets are also divided into owned and leased, depending on ownership. Assets are also distinguished by the speed of their transformation into monetary form, that is, by the degree of liquidity, these are:

• absolutely liquid assets,
• highly liquid assets,
• medium liquid assets,
• weakly liquid assets,
• illiquid assets.

Types of assets

Assets in the modern investment interpretation are all investments that generate constant (passive) income or increase in value over time: investments that generate constant income, profits from your own business, land, real estate, etc. There are many different assets, the most famous and popular of which are:

Types of liabilities

The following are considered liabilities:

• mortgage;
• loans;
• credit cards;
• consumer loan taken for the purchase of expensive items, travel, etc.;
• all property (movable and immovable): apartment, car, household appliances, gadgets, etc. Everything that a person owns and uses in everyday life is considered liabilities;
• unprofitable business, since additional funds will be needed to close it;
• money borrowed. Even if money was lent without interest, it is still a liability, since it must be returned.

To better understand what a passive is, we can consider two examples:

1. A man bought an expensive car. It appears to be a valuable purchase and could be considered an asset. However, as soon as the car leaves the showroom, it immediately loses about 20% of its price. The owner will have to pay insurance, buy gasoline, pay for repairs, etc. Consequently, in this situation, the car does not make a profit, but requires additional expenses.
2. A man took out a mortgage and bought a house. The banker considers the purchased real estate an asset, and in his own way he is right. But the subtlety is that the house is an asset of the bank, but not the borrower. It makes no difference to the banker what the loan is for: to purchase a house, a yacht, or a luxury car. The bank will own this property until the borrower pays off the entire cost with interest. Thus, the acquired property is a liability.

An asset can become a liability and vice versa

For example, people suddenly moved out of an apartment that the owner had rented out. The owner remains the owner of the apartment and bears the burden of expenses: rent, utilities, repairs, taxes, etc. All this makes him poorer, which means the apartment is considered a liability. But when this apartment is rented again, it will again be a source of income. Therefore, we can conclude: a liability makes a person poorer, and an asset makes a person richer.

Take a look at two more examples:

• It was stated above that purchasing a car is considered a liability. If we assume that the owner of the car decided to work as a taxi driver, the car becomes an asset, since it will generate income;
• real estate (houses and apartments) purchased for rental is an investment and therefore generates profit. Even if we take into account the growth of inflation by 15 -20% per year, the value of real estate grows over time, and such investments bring profit to the owner.

Low-income people tend to spend all their income. All funds are spent on food, utilities, taxes, Internet, communications and entertainment. There is barely enough money until the next salary. A person is forced to borrow money, then pays off his debts, and so on all the time. There are no opportunities to acquire assets.

Middle class people have a lot of expenses equal to a lot of money they earn. These people are accustomed to leading a decent lifestyle and acquire many liabilities: a house, a dacha, a car, etc. Often, to make these acquisitions, they take on debt. It turns out that the higher their income, the higher their expenses. The middle class pays a lot to cover their debts: the more they earn, the more they spend.

Rich, wealthy people are distinguished by the fact that they try to get rid of liabilities and acquire assets. If they really want to buy a liability, they first buy an expensive asset. Wealthy people constantly make sure that their assets always exceed their liabilities.

For example, I wanted to buy a new car. First you need to buy real estate and rent it out, and only after that buy a car. It's safe to say that passive income is created with the help of assets.

What to do with liabilities and assets

Mr. Kiyosaki speaks out clearly on this matter: get rid of the former and accumulate the latter. By the way, this approach causes criticism against him. According to the guru, I should sell my car because it is not generating income. Dacha - for the same reason. Yes, a lot more.

On the other hand, if I earn less than I pay for the maintenance of my liabilities, then sooner or later I will lose them anyway. Therefore, in my opinion, it can be formulated this way: maximize your income-generating property, reducing expenses to reasonable limits. This is exactly what successful companies do.

Maintaining balance

Our world cannot exist without liabilities. People live in houses, drive cars, and enjoy the benefits of life. You need to learn to find a balance, try to ensure that the income received from assets far exceeds expenses. In order for your life to be financially stable, you first need to determine your existing liabilities and monthly expenses, identify unnecessary expenses and decide how to reduce them.

Then evaluate the assets, determine what and how generates income every month. There can be many sources of income. They contribute to the achievement of financial freedom when money works for the person, and not the person for it. Having assets, a person stops working for money. Of course, you can have a country villa as a liability, but this is if the owner is a billionaire and also has factories, oil rigs, a yacht, etc.

It is necessary to take into account that by owning assets you can live in abundance, but for this you need to learn to live within your means. Try not to take out loans, and if you have them, pay them off on time. Credits and loans are monetary bondage, lowering the overall standard of living.

You need to create a step-by-step action plan to increase income and reduce expenses. Buy assets when free funds appear from existing assets. This could be profit from real estate or business, interest from investment activities. A clear understanding of what the actions taken can lead to - a decrease or increase in well-being - is necessary.