Assets and li­ab­il­it­ies: What are they?

Generally speaking, assets and li­ab­il­it­ies represent the use and origin of a company’s funds. They are the two halves of every balance sheet and face each other: the assets on the left, the li­ab­il­it­ies on the right.

The two sides must always be balanced against each other – this is an important rule for any balance sheet. This means that the addition of all assets must result in the same sum as the addition of all li­ab­il­it­ies.

Balance sheet assets comprise the available assets of an en­ter­prise, i.e. those goods and other means which the business uses to perform its op­er­a­tion­al functions. The assets are shown on the left side of a balance sheet. Here is how they are clas­si­fied:

• Fixed assets
• Current assets
• Accruals and deferrals
• Deferred tax assets
• Asset dif­fer­ence from asset off­set­ting

Fixed assets include all assets and other goods that are per­man­ently available to the company and used in business op­er­a­tions. This includes, for example, pro­duc­tion machinery, a vehicle fleet, land and buildings, but also in­tan­gible assets like patents, licenses, and brands, as well as long-term financial assets and in­vest­ments in companies.

Current assets, on the other hand, comprise the funds and goods that the company has at its disposal in the short term for op­er­a­tion­al purposes. These are, for example, raw materials, com­pon­ents, or in­ter­me­di­ate products which are sub­sequently either consumed, sold, or converted into other products. A company’s current assets also include bank balances, cash in hand, re­ceiv­ables from debtors, and short-term financial assets.

Prepaid expenses are paid for in one ac­count­ing period, but will not be used until a future ac­count­ing period. On the assets side of the balance sheet, items include expenses which were incurred before the balance sheet but which only represent expenses at a later date, like advance payments.

Deferred tax assets can be included on the assets side of the balance sheet if the com­mer­cial and tax balance sheets differ in such a way that tax relief can be expected in the next financial year, e.g. through a loss carried forward.

In the case of pension ob­lig­a­tions to employees and similar long-term ob­lig­a­tions, the current fair value of the assets serving this purpose counts (instead of the ac­quis­i­tion principle). These li­ab­il­it­ies are offset against the assets, contrary to the otherwise ap­plic­able pro­hib­i­tion of off­set­ting. An active dif­fer­ence occurs when the assets are higher than the debts. The amount must also appear on the assets side of the balance sheet.

Li­ab­il­it­ies are shown on the right-hand side of the balance sheet. They show where a company’s funds have come from. Balance sheet li­ab­il­it­ies are roughly broken down as follows:

• Equity
• Accruals
• Li­ab­il­it­ies
• Accruals and deferrals
• Deferred tax li­ab­il­it­ies

All balance sheet items, with the exception of equity, are sum­mar­ised here under the term “borrowed capital.” These are values that are available to the company but must (safely or possibly) be repaid in the fore­see­able future. They also include pro­vi­sions with respect to expected li­ab­il­it­ies.

Equity includes sub­scribed capital. Depending on the company’s legal form, this is called ordinary share capital, plus any capital increases. In addition, equity consists of reserves. A company capital reserve is created, for example, when shares are issued in excess of their normal value. This reserve is financed ex­tern­ally, so to speak, while the revenue reserve ori­gin­ates from the company itself and may have to be formed from the company’s business result. The profit or loss carried forward also counts as equity. This is a residual profit or loss from the previous year. Finally, the net income or loss for the year also belongs to equity.

Accruals are ob­lig­a­tions, e.g. for future pension payments or taxes, which are uncertain with regard to their actual amount and the time of their oc­cur­rence.

All the company’s specific debts are also shown on the li­ab­il­it­ies side of the balance sheet. The cor­res­pond­ing funds are still available, but must be repaid on known dates. Therefore, they are included under li­ab­il­it­ies.

Services rendered by the entity after the balance sheet date, but invoiced in advance, appear as deferred income in the balance sheet (e.g. rental income for the following year).

Like deferred tax assets, deferred tax li­ab­il­it­ies also exist. These are expected future payment ob­lig­a­tions to the tax office, resulting from different asset valu­ations, li­ab­il­it­ies, and deferred income according to com­mer­cial law and tax criteria. They belong to debt capital and must therefore appear on the li­ab­il­it­ies side of the balance sheet.

The li­ab­il­it­ies on the right-hand side of the balance sheet show where a company’s capital comes from and either money that must be paid or services that must be performed. The assets on the left show what resources the company has at its disposal to generate earnings. A suc­cess­ful company has more assets than li­ab­il­it­ies, meaning it has the resources to fulfil its ob­lig­a­tions.

Therefore, the two sides of a balance sheet must also be balanced, and double entry ac­count­ing software will always ensure that that is the case.

The gross assets, i.e. the total assets of a company, are dis­tin­guished from the actual net assets. The total assets comprise the total value of a company’s (or other business entity’s) assets, i.e. its tangible assets as well as funds and re­ceiv­ables. Net assets consist of these total assets minus the company’s li­ab­il­it­ies. The li­ab­il­it­ies side of the balance sheet provides in­form­a­tion about these debts.

An example: A company owns a property worth £3 million. This asset is shown as part of the fixed assets on the assets side of the balance sheet. On the li­ab­il­it­ies side, however, it can be seen that 50% of the property is credit-financed. The real estate con­trib­utes £3 million to the en­ter­prise’s total assets, however, the net assets only show £1.5 in the books.

Assets and li­ab­il­it­ies are the right and left sides of a company’s balance sheet. This balance sheet, in turn, is an important in­stru­ment that provides in­form­a­tion about the company’s economic situation. If your business were a living organism, these would be its vital signs. Assets and li­ab­il­it­ies are the key in­gredi­ents of your company's financial position. Revenue and expenses represent the flow of money through your company’s op­er­a­tions. A balance sheet must be drawn up in ac­cord­ance with the prin­ciples of proper ac­count­ing, i.e. according to the rules that en­tre­pren­eurs who are obliged to draw up a balance sheet must observe when recording their business trans­ac­tions within the framework of current ac­count­ing.

Please note the legal dis­claim­er relating to this article.