Assets vs. Liabilities – What’s The Difference
If you are a business owner, as 2020 approaches you might find yourself reevaluating your business financials. It’s important that you recognize that your business, no matter how big or small it is, is made up of both assets and liabilities. Each item plays an important part in how much your business is worth as a whole. If you are not familiar with neither assets nor liabilities, we want to help you understand what each of them are, and how they make up your business’ worth. Once you understand your assets and liabilities you might begin to see that they can affect what decisions you make and how you run your business as well. So, let’s dive into assets and liabilities so we can understand the difference.
Let’s begin with your company assets. An asset is a broad term that covers a lot of ground. An asset is something that is owned by a company or business that provides value to them. Assets come in many different ways, both tangible and intangible as well as fixed versus current! In the world of tangible assets, this term refers to more of the physical items that provide value to your company this, for example, this could include something such as technology, real estate, or company vehicles that people drive. Within tangible assets you also have both your fixed and current asset. A fixed asset is something that cannot be quickly liquidated to cash. Whereas a Current asset would be considered something that can be quickly liquidated into cash for your business. Then there also is intangible assets which refer to something obviously intangible or “less” tangible, this could be something such as an idea, patent, or copyright. If you are interested or curious to dive deeper into the world of assets, take a look at our blog where we explain the difference between fixed and current assets here
Now looking at your business’ liabilities. The word liability can seem a little bit scary and just like an asset covers a lot of ground, but actually a liability is a pretty simple concept. Generally speaking, a company’s liability is any thing that they responsible for or are “tied down” with – let us explain further. When a business has an obligation to another business, person, or service, that would be considered a liability. This could be anything from a payment, to a service, to an event. Liabilities are broken into current (short-term) or non-current (long-term) liabilities. A short-term liability is something an obligation that will be completed in less than 12 months. This often includes accounts payable, and other smaller debts that might incur on behalf of the business. A long-term or non-current liability is an obligation that will take more than 12 months to finish. This would include something such as a mortgage or in some cases, although less common, post-employee benefits. A liability also can be alternatively defined as something that costs more money than is worth. This would be more in the case of machinery or equipment. If you have a very old piece of equipment that you are continually spending money on to fix or keep going, eventually that item will no longer be considered an asset and will turn more over into a liability for your business.
Now that you have a good understanding of what both assets and liabilities are, it may be easier to see how they are different. An asset is any thing or item that adds value to your business, where a liability is something that is going to take away value from your business. Looking at the two it is much easier to see how they work together and how every business has both assets and liabilities both! Now you can maybe understand and see a little bit better how each part of your business is either an asset or a liability. If you are interested in learning more about your company’s assets, contact us today! Miedema Asset Management Group is happy to meet with you and help in any way that we can. To see a full list of our services – click here.