Asset and Liability Explained
Understanding assets and liability is important so let’s take a look at what they mean, but let’s start with account and have those explained first. Having a good knowledge of your accounts will make your life a whole lot easier. If you plan to go into business or join one of your family businesses, intend to take out a loan, are searching for a job in marketing or plan to manage assets it’s imperative to have a basic understanding of accounts.
Accounting
Accounting is split into two main categories: Cash Based Accounting and Accrual Accounting.
Cash Based Accounting is the management of one’s own personal money transactions. It’s the process of keeping logs of all money withdrawn, received, given or deposited.
Accrual Accounting needs an accountant who makes note of all the transactions, even ones where money doesn’t change hands. It works on the principles of comparison between the ratio and correlation of expense to expenditure. Should you be spending too much you need to cut out the luxuries, if not you should put some to one side for a rainy day. This form of accounting informs you how much you owe which may not tie in with the bank figure.
There are several important terms in accounting that you ought to be aware of. Let’s take a look at them:
Assets
The term assets is used to describe the possessions of any individual whose possessions have decent value. Assets are further classified into three sub sections: Fixed Assets, Current Assets, Intangible Assets.
Fixed Asset
These are assets of value such as property, equipment, machine and other items that are not intended for sale.
Current Asset
Current asset is the cash. This is money held in bank accounts. This also encompasses other forms of cash such as shares, stocks and bonds. Money lent and due in the future also counts as current asset.
Intangible Asset
Intangible assets are the untouchable assets such as trademarks, patents, copyrights etc. They have immense monetary value but cannot usually be sold on.
Liabilities
The trick is that where you find assets you will also find liabilities – it’s the law of opposites. Liabilities include debts expected by your creditors and lenders. You can pay these with cash or another asset such as jewelry, goods or services.
There are two different types of Liabilities:
Current Liabilities
Liabilities are the liabilities that you will need to be prompt with and pay back in a given time limit. Current Liabilities are usually paid back with current assets. These include bills, note payable loans with fixed repayment dates and other essential and compulsory expensives such as interest, wages, taxes. These do not always have bills attached with them, but it’s essential that they are paid on time nonetheless.
Long Term Liabilities
Long term liabilities are debts that can be paid back over a longer time period. They have longer tenures and generally are less worrisome.
Economic Capital
The economic capital is also the financial capital. It is anything, be it merchandise or possession that equates to wealth or other capital. There are 4 methods to display and manage capital. Firstly, capital is necessary when any contract is drawn up with a capital asset. These financial instruments work as currency in the event of a purchase, sale, or trade of goods, for example medium exchange. Secondly, it works as settled medium for deferred payment. Thirdly, this unit has a market value which varies with the current economic standing of a country. Lastly, the value is related to the financial capital that should be recovered and saved. It’s actually a collection of real estate, gold and collectibles – amongst other things.
Petty Cash
Petty Cash is incredibly important to business. It’s the tiniest account in a business or the cash and coinage used to pay minor expenses.
Type of Business
Business comes in several varieties and it’s always worthwhile being familiar with those. Let’s take a look at them now:
Partnerships – These are companies founded by two people sometimes more who own the business together.
Sole Proprietorship – This is an individually owned business.
Corporations – These include many investors and shareholders who are all jointly responsible for the business and any decisions related to it.
Limited Liability – These are the sister corporations. Members of these businesses are under no obligation to cover the costs and pay the debt if the business folds.
Payrolls
The payroll is the manner and method you use to pay your employees – including yourself. Many large companies outsource this aspect of their business to service providers, usually with good results.
This brief introduction to assets and liability should help you to understand the basic workings of accounting. It is very important that you have a level of knowledge on the subject as it is important in many areas of life, not just business itself.