Assets and Liabilities

What do you understand by the word "Asset?"

Assets are items which are owned by a business or money which is owed to the business.
If Pepe owned his pizza parlour then the building would be an asset of his business.

Assets fall into two groups:

Fixed Assets - These are items which have a life span of more than one year. They are usually items that the business expects to keep. Fixed assets include land and buildings, plant and machinery, fixtures and fittings and motor vehicles. These assets fixed because they are necessary for the business to trade but are not affected by the level of trade or the profit made. If a business purchases any fixed assets then this is known as capital expenditure. If Pepe decided to purchase a new delivery van then it would be a new fixed asset of the business.

Current Assets - These are items which are much shorter term. The value of these items change in proportion to the amount of trade that a business engages in. If Pepe's business is doing good trade then he would have to purchase more stock (i.e. pizza bases, cheese etc.). This stock would be a current asset of the business.
Current assets include stocks (raw materials, work in progress and finished goods for resale), debtors (money owed to the business), bank balances and cash in hand.

Current assets are often described as being more "liquid" or having higher "liquidity". What this simply means is that assets of this type are much easier to turn into cash.

What do you understand by the word "Liability?"

Liabilities are amounts that are owed by a business. These fall into two groups.

Long term liabilities - These are loans that are repayable in more than one year. If the business premises were mortgaged, then that mortgage would be a long term liability. In addition, the capital put into the business by the owner would be looked on as money that is owed by the business to the owner. This again would be a long term liability.

Current liabilities - These are amounts which are owed by a business which must be repaid within the next twelve months. Current liabilities include money owed to creditors (for goods purchased but not yet paid for), money owed for services such as the telephone bill (often called accrued expenses) and bank overdrafts. You may think that an overdraft is repayable over a longer term but the bank can demand repayment at any time.

If you have worked through each of the sections of background reading you are now ready to learn about trial balances, trading and profit and loss accounts, balance sheets, cash flow statements and solvency / profitability / performance ratios.

You can either return to the"background reading" menu if you are still unsure of anything or you can go to the accounts menu to begin the next stage of your work.

Source:
http://www.bized.co.uk/