Do you know the differences between assets and liabilities? Have you considered these for your business?
Any assets for your business offer future economic benefits while liabilities present future obligations.
Successful businesses tend to have a higher proportion of assets to liabilities.
When considering your assets and liabilities,it’s vital to also consider:
- The ability of your business to convert an asset into cash within a short period of time. Even if the assets far outweigh the liabilities, a business cannot pay its’ liabilities on time of the assets cannot be converted into cash.
- The difference between assets and liabilities is equity – the residual ownership of owners in a business
For individuals, the main asset may be their homes. Offsetting this is a mortgage which is a liability. The difference between the home asset and the mortgage liability is the equity of an owner in the house.
Examples of assets
A cash asset is anything that can be readily converted into cash such as savings, shares, stocks, loans to others or the net equity of property you own but don’t live in.
“Accounts receivable is short-term amounts due from buyers to a seller who have purchased goods or services from the seller on credit. Accounts receivable is listed as a current asset on the seller’s balance sheet.
The total amount of accounts receivable allowed to an individual customer is typically limited by a credit limit, which is set by the seller’s credit department, based on the finances of the buyer and its past payment history with the seller. Credit limits may be reduced during difficult financial conditions when the seller cannot afford to incur excessive bad debt losses.
Accounts receivable are commonly paired with the allowance for doubtful accounts (a contra account), in which is stored a reserve for bad debts. The combined balances in the accounts receivable and allowance accounts represent the net carrying value of accounts receivable.
The seller may use its accounts receivable as collateral for a loan, or sell them off to a factor in exchange for immediate cash.
Accounts receivable may be further subdivided into trade receivables and non trade receivables, where trade receivables are from a company’s normal business partners, and non trade receivables are all other receivables, such as amounts due from employees”
Any interest that has been earned but not yet received in cash is interest receivable. Once the actual interest payment is received, the entry is a debit to the cash account and a credit to the interest receivable account therefore eliminating the balance in the interest receivable account.
Examples of liabilities
Accounts payable is an accounting entry that represents an entity’s obligation to pay off short-term debt to creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.
These are also known as ‘payables’.
Dividends payable are dividends that a company’s board of directors have declared to be payable to shareholders. Until the money is paid to shareholders, the cash amount of the dividend is recorded within a dividends payable account as a current liability.
Income tax liability is the total amount of tax that an entity is legally obliged to pay to an authority as the result of the occurrence of a taxable event. Income tax liability can be calculated by applying the appropriate tax rate to the taxable event’s tax base.
Unearned fees from franchises
An unearned fee in accounting is money a business collects from a customer up front for services the company has yet to perform. A good example of this is a prepaid annual membership. If a small business collects unearned fees, they must initially be recorded as a liability on the balance sheet. As you complete the services for those fees, the fees become earned revenue which you record on the income statement.
How can The Kelvin Partnership help you?
Your Glasgow accounts, The Kelvin Partnership, are committed to helping our clients fully understand their accounts and assist with the management of them in an efficient, professional manner.
If you’re looking to find out what your assets and liabilities are, or how to manage them, get in touch with us today. We look forward to hearing from you!