What are assets and liabilities?
Income, expenses, debts are just separate strokes in the overall financial picture. Understanding accounting helps investors identify the sources of company funding, calculate profitability, and assess risks.
This is critically important when conducting investment analysis, so today's article topic: «Assets are...» Use this information in your decisions.
- What are assets and liabilities
- What to do with liabilities and assets
- What is the net assets of the enterprise (NA)
- Enterprise Net Assets: Interpretation
- Classification of non-current assets
- Classification of current assets
- Classification of liabilities
- Valuation of assets according to the balance sheet
- To develop a personal financial strategy, you need to find out for yourself a few basic points:
What are assets and liabilities
Assets are things that generate income. Buildings, apartments, cars, money in accounts, etc., if they work and make a profit. On the contrary, liabilities are expenses that ensure the operation of the enterprise. The relationship of expenses and income is reflected in the balance sheet. This is perhaps the most complex and important subject in accounting to understand.
- Assets — all that brings income to its owner. In other words, it is a positive cash flow;
- Liabilities — negative cash flow. This is all that a person spends money on without the opportunity to receive income.
The difference between liabilities and assets
A simple and ingenious example is shown in the cartoon «Three from Prostokvashino». Remember?
The cow was rented. She gives milk — it's an asset. Also calved. The rent for it is a liability. We bought a cow and a calf — reduced liabilities. There was one animal, now there are two. Both will be profitable. Ready, by the way, a variant of the business model! But this is so, schematically. Let me look into the problem in more depth.
There is an opinion that if an enterprise can sell its securities and get money for them, then these are assets. Not certainly in that way. The result of the sale, indeed, will be the proceeds. They can be used for different purposes. And the shares themselves are liabilities. They act as a fundraising mechanism.
Interaction of assets and liabilities
Here is an everyday example: a citizen bought a car to go to work and to the dacha. Here he acquired a liability. The car immediately lost in price, because. became second-hand, requires expenses for refueling, repair, storage, etc. Then this person decided to work on his car, receiving a fee for this. Then the car becomes a core asset. With it, a person makes a profit. In enterprises, the situation is similar.
Assets and liabilities in financial statements
These are the main indicators that allow you to almost completely evaluate the activities of the enterprise. They correlate with each other and are reflected in the form of a table. Simply put, these are articles of the general balance — the report of the enterprise for a certain period of time.
Assets and liabilities according to Kiyosaki
This gentleman has published 26 books on financial topics. His brilliant work Rich Dad Poor Dad, along with other works, is sold all over the world.
Of course, these are the basics of economics «for dummies». This approach is too simplistic and controversial. However, in everyday life it is quite acceptable. Firms are more difficult. Judge for yourself.
I will give the balance of the organization in the form of a table.
|negotiable. Money or goods to be sold within a year.||Equity. It is formed at the expense of the founders' money. It turns out that the company, as it were, borrows money, and is obliged to return it to the owner. Conditionally, of course. But since it must, it means passive.|
|Non-current. What the company is not going to sell: land, buildings, machines, vehicles, long-term investments, etc.||Ensuring future payments.|
|Future expenses. Expenses carried over to the next term after the reporting period. Example: car insurance for 2 years. Payment of the second year of the insurance policy, in the report of this year, will be reflected in the column «Assets».||Long term duties. Own shares, bonds, mortgages, leasing, loans, etc.|
|Revenue of the future periods. Something for which money has already been received, but services or deliveries will be made next year.||Current expenses (liabilities).|
What to do with liabilities and assets
Kiyosaki speaks unambiguously about this: get rid of the former and save the latter. By the way, this approach also causes criticism in his address. According to the guru, I should sell my car because it doesn't generate income. Dacha — for the same reason. Yes, a lot more.
What is the net assets of the enterprise (NA)
The company has its own funds, which can be valued in money. There are also debts. The difference between the first and second shows the net assets of the enterprise.
How is the asset and liability of the balance sheet formed?
The basic rule of compiling the balance sheet of the company: the indicators must be equal to each other. For example, a company has issued a loan for 500 thousand rubles. This money is reflected in the column of assets. At the same time, they are recorded as a liability as a debt of the enterprise.
Enterprise Net Assets: Interpretation
A positive indicator of the net assets of the enterprise indicates the efficiency of its work. This indicator is taken into account by investors when making decisions on the purchase of securities, and by banks — in matters of lending.
On the other hand, young enterprises may have a negative Net Assets ratio, but not be unprofitable. Therefore, these figures should be studied in dynamics.
Codes and lines of the balance sheet
The balance sheet is compiled according to a specific algorithm. There is a separate line for each indicator. The lines are assigned individual codes for the convenience of statistical accounting and control.
Each line expresses a cost indicator showing the operation of the enterprise. Modern codes are displayed as a four-digit number, where each digit contains specific information.
Non-core assets are also displayed by the accounting department in the balance sheet of the enterprise.
Diagnostics of business performance using the net asset method
One of the main conditions for the prosperity of the enterprise is the constant search for opportunities for the growth of Net Assets. A negative indicator of this indicator may indicate that the company is unprofitable, not solvent, exists on the money of creditors. In this case, the company may be liquidated in court.
Classification of non-current assets
All non-current assets of the enterprise are divided into several types. The largest and most significant of them is fixed assets. These include:
- Buildings for various purposes (offices, warehouses);
- Production equipment;
- Manufacturing inventory.
All these assets form the basis of the enterprise, allow organizing the production process and selling products.
Non-current assets also include the following types of valuables:
- Intangible assets. This group includes objects of intellectual property — patents for inventions and industrial designs, copyrights, trademarks.
- Long-term financial investments. This is money invested in startups or other companies, securities and government bonds.
- The company may also have other non-current assets. This group includes objects of construction in progress, creative developments, etc.
Classification of current assets
All current assets are also divided into types.
- Cash. This includes company accounts in banks, cash on hand.
- Inventory — inventory, materials, goods and finished products.
- Accounts receivable — the right to receive funds from counterparties or debtors. For example, a store buys a batch of goods from a manufacturer. The payment for it will be accounts receivable.
- Financial investments — investments in securities of other enterprises, bank deposits, loans issued.
To attribute this or that object of property to one or another type of assets, it is necessary to analyze its purpose (use in production, subsequent sale), source of income (own production, receipt from third-party sources).
Classification of liabilities
A liability always reflects the obligations that an organization assumes in the course of its activities. Liabilities can be short term or long term. In the first case, the obligations assumed (for example, payment for a batch of raw materials) must be repaid within 1 year from the date of the balance sheet. In the second case, partial repayment of the debt over a long time is implied (for example, a bank loan).
There are three categories of an organization's obligations:
- Imaginary liabilities. They are always reflected in accounting, but in fact they are absent. Take them into account to calculate the exact value of net assets.
- hidden liabilities. This kind of obligations, which are actually absent, but are reflected in the structure of tax and credit payments. They appear due to untimely write-off of tax and credit debts.
- Actual — all those obligations that are in fact. When fulfilling obligations on these liabilities (for example, making a monthly payment on a loan), the company loses part of its assets.
Valuation of assets according to the balance sheet
This approach uses company reports. This is necessary to determine the value of property, both tangible and intangible, as well as existing obligations. Along with market valuation and income valuation, it helps to create a holistic picture of the operation of the enterprise.
Cost and average value of total assets
The sum of current and non-current assets shows the value of the total assets of the company. In simple terms: if you add these figures at the beginning and end of the year and divide by 2, then we get the average total assets of the organization for the year. These data are needed to assess the dynamics of the enterprise development.
Real asset ratio
It characterizes the potential of the company. It is calculated from the sum of the residual value of fixed assets, raw materials, materials, intangible assets, work in progress. The result obtained must be divided by the value of the property of the organization.
Asset immobilization ratio
The share of non-current assets in the balance sheet. It characterizes the degree of liquidity of the enterprise's property and the ability to meet its obligations.
Permanent balance index coefficient
These, and a number of other ratios that reflect the company's performance, are carefully evaluated by professional investors. The decision to purchase securities should not be based solely on intuition or the opinion of outside experts. You need to carefully study all the indicators.
To develop a personal financial strategy, you need to find out for yourself a few basic points:
- Determining the exact amount needed to service existing liabilities (loans, education, transport, food);
- Optimization of the received amount. In every budget, there are expenses that can be waived without significant damage to the quality of life. These can be frequent trips to the cinema and cafes, spontaneous shopping, ordering ready-made food at home, etc.
- Next, you need to calculate and predict assets. All available sources of income are noted here — income from renting real estate, benefits, wages and bonuses.
- Revealing the difference between assets and liabilities.
The next step is to draw up a step-by-step action plan to increase income and reduce costs. The best solution would be the acquisition of new assets with the money received from the operation of existing assets. Any action should be taken after a thorough analysis of possible risks.
Assets and liabilities have long ceased to be exclusively accounting terms. Proper distribution of personal finances between them will help to increase capital and not get bogged down in debt obligations. Basic knowledge about these concepts will be useful to everyone — novice investors, businessmen and even housewives.