Assets and Liabilities

Assets and Liabilities

Assets and Liabilities Definitions

Assets and Liabilities are terms used in economics and accounting. Assets represent property or rights to property and liabilities are debts owed to others. Assets and liabilities together determine the wealth of an individual, a firm, or a nation.

In Accountancy

An entity’s wealth is measured as of a specified date and is often listed on a balance sheet, with assets on one side and liabilities and owner’s equity on the other. However, individuals, firms, and nations have somewhat different assets and liabilities.

Individuals

An individual’s assets might include cash, bank deposits, stocks, rights to future pension payments, and a house and its contents. An individual’s liabilities might include, for example, a home mortgage, debt incurred on a car or other personal possessions, or other financial commitments, such as income tax liabilities.

Companies

The composition of assets and liabilities for a firm would be different. Included among a firm’s assets might be its plant and machinery, its inventories of raw materials or goods in the process of production, or finished goods not yet delivered to customers. A firm’s assets should include receivables—debts owed to the firm, perhaps for goods delivered but not yet paid for—and income from any financial assets the firm might have, such as stocks or bonds.

Firms will also usually be more valuable than the sum of their assets because they expect to earn income as a result of the existence of the firm as a going concern, a unit producing goods or services for customers. This is commonly defined as goodwill. On the liability side of the balance sheet, the firm will have its financial obligations—debts owed to suppliers or other obligations, such as outstanding tax liability. If the firm has borrowed money from a bank or issued bonds to raise money, these obligations would be listed as liabilities as well.

Countries

A country has still another set of assets and liabilities. A national balance sheet will not simply be the sum of the balance sheets of individuals and firms. A nation’s assets also include national capital, such as public buildings (including public libraries, royal palaces, and government offices); publicly owned parts of the transportation infrastructure; or certain natural assets, such as raw material deposits, or national forests.

These items may not be included on the balance sheet of any other entity. It is also arguable that since the most important asset of a nation is its labor force, it should be included on the balance sheet in some way. Obligations and liabilities between firms and individuals in the same country will cancel out—one person’s liability to pay is another person’s asset.

But a nation may own assets (physical or financial) overseas, and foreigners may own capital (physical or financial) within a nation. The accounting of a nation’s wealth, therefore, should take account of net liabilities to the citizens, firms, and governments of other countries.

More Accounting Entries

Accounting information can be classified into two categories: financial accounting or public information and managerial accounting or private information.
Read about Financial Accouting here
Read about Managerial Accouting here

Specialized Accounting

Of the various specialized areas of accounting that exist, the three most important are auditing, income taxation, and nonbusiness organizations. Auditing is the examination, by an independent accountant, of the financial data, accounting records, business documents, and other pertinent documents of an organization in order to attest to the accuracy of its financial statements. Read about Auditing here

The second specialized area of accounting is income taxation. Read about income taxation here

A third area of specialization is accounting for nonbusiness organizations, such as universities, hospitals, churches, trade and professional associations, and government agencies. Read about accounting for nonbusiness organizations here

Financial Reporting

Traditionally, the function of financial reporting was to provide proprietors with information about the companies that they owned and operated. Read about financial reporting here

Accounting Principles

Accounting as it exists today may be viewed as a system of assumptions, doctrines, tenets, and conventions, all encompassed by the phrase “generally accepted accounting principles.”Read about accounting principles here

The Balance Sheet

Of the two traditional types of financial statements, the balance sheet relates to an entity’s position, and the income statement relates to its activity. The balance sheet provides information about an organization’s assets, liabilities, and owners’ equity as of a particular date (such as the last day of the accounting or fiscal period). Read about income balance sheet here

The Income Statement

The traditional activity-oriented financial statement issued by business enterprises is the income statement. Read about Income Statements here

Regulations and Standards in the United States

Until 1973, accounting principles in the United States had traditionally been established by certified public accountants. Read about Accounting Regulations and Standards in the United States

Source: “Assets and Liabilities”Microsoft® Encarta® Online Encyclopedia

See Also

Bookkeeping in the World
Accounting in the World


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