What is an Asset? & Classification of Assets and Liabilities
What is an Asset?
An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.
Classification of Assets
Current Assets: These assets are acquired and held for consumption or resale in the ordinary course of the business. Current assets include cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.
These are the assets which are to expected to use by the entity within 1 year from the reporting date.
Fixed Assets: These assets are permanent in nature. They are acquired for the purpose of generating revenue and are not meant for resale. For the purpose of showing in Balance Sheet, these assets are shown at cost less depreciation and market value is not under consideration because these assets are for the purpose of use. Fixed assets include land, building, plant & machinery, motor vehicle, furniture & fixtures, etc.
These are those assets whose benefit is expected to last more than 1 year from the reporting date.
Tangible Assets: Tangible assets are assets which we can see, touch, and feel. All fixed assets are tangible assets. Moreover, some current assets are also tangible assets like cash, inventory.
Intangible Assets: Intangible assets are assets which cannot be seen, touched or felt physically by us. Some examples are Goodwill, Patent, Copyright, Brands, Trademark, etc.
Wasting Assets: The fixed assets which have a limited useful life and which depreciate rapidly are called wasting assets, e.g., mines, quarries, etc. In other words, fixed assets which have a fixed content, like coal in a coal mine; the value of the asset goes down as the contents are taken out. When the minerals have been taken out totally, the mine will become useless.
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What is Liability?
A liability is a company’s financial debt or obligations that arise during the course of its business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services.
Classification of Liabilities
Current Liabilities: The liabilities which are payable within a period of 1 year are current liabilities. These liabilities are also known as short-term liabilities. Creditors, salaries and wages payable, gratuity or bonus payable, interest payable, bills payable, sundry creditors, a bank overdraft or cash credit, unclaimed dividends, pre-received incomes, sales tax payable, income tax payable, provisions, other taxes payable, accrued expenses, etc. are all examples of current liabilities.
Fixed or Long-term Liabilities: The liabilities which are payable within a period of 1 year are current liabilities. Long-term bank loans like term loans, debentures, deferred tax liabilities, mortgage liabilities (payable after 1 year), lease payments are examples of long-term liabilities.
Certain liabilities are payable on the occurrence of some event or contingency. Contingency signifies something which may or may not take place. If a liability is due on happening of such an event, it is termed as the contingent liability. Default in supply, breach of contract, damage to the environment or to the prestige of some person or entity, an outcome of accidents and other law-suits, are examples of some such cases where a liability is contingent to occur. Such liabilities are calculated on the basis of “what if the actual loss occurs” where ever possible and with an addition of a notional calculation of damage occurred to the person or entity.
For the detailed explanation of classification of Liabilities, watch demos..
Note- Contingent liabilities are not included in the Balance Sheet but are mentioned separately as a note on the balance sheet.
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