Asset and Liability Basics

To understand the balance sheet, you must first understand asset and liability basics.

Asset Basics

Your assets include all property that you own or that is owed to you. For example, cash, land, buildings, equipment, accounts receivable and inventory.

There are three types of assets: fixed, current and other.

Fixed assets includes assets that you expect to be of value to you as is for more than a year. Examples of fixed assets are equipment, land, buildings, furniture and vehicles.

Fixed assets are depreciated each year, meaning that their value is a little less each year. For example a truck is more valuable brand new, but depreciates in value as it is used and worn. In accrual accounting, you will take this depreciation into account.

Current assets are assets that are only useful for their cash value or for their ability to bring cash into your business. Examples of current assets are cash, accounts receivable and inventory.

Other assets include assets that do not fall in the category of either fixed assets or current assets. Examples of other assets are pre-paid insurance and patents.

Liability Basics

Liabilities include money that you owe such as accounts payable, taxes, credit cards and loans.

There are three types of liabilities: current, long-term and other.

Current liabilities includes money that is due in less than a year such as credit card bills, and other bills that are due to your vendors, payroll tax and sales tax.

Long term liabilities includes money that you will take more than a year to pay back. This usually includes things like mortgage payments, car loans and business loans.

Other liabilities can also be known as contingent liabilities because they are contingent upon unforeseen circumstances such as pending lawsuits and loans that you co-signed on.

Related Topics

Tangible vs Intangible Assets

Balance Sheet

Equity

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