Assets and Liabilities Essay
Assets and Liabilities
Asset is an item of value owned by the company. Assets can be tangible i. e. those which have some physical existence or can be intangible i. e. which do not exist in physical form but can be held in the form of contracts or rights. Assets are usually grouped in order of liquidity (ease of conversion to cash) on the balance sheet. Cash is therefore the most liquid of all assets. Assets can be classified as: 1. ) Current Assets – Those assets that are expected to be converted to cash in 12 months or less. This can be in the form of cash, accounts receivables, inventory for producing goods etc. 2.
Investments – These are the investments which the company make in other companies in the form of equity purchase, bonds etc. 3. ) Fixed Assets – A fixed asset is one that is held for the purpose of producing or supplying goods or services and not for sale in the normal course of business. They are also referred to as long lived/ long term assets and are sub-classified as following: a. Property, Plant & Equipment – These are tangible items having physical existence and can be seen and felt. b. Intangible Assets – They have no physical existence and rather represent legal rights with associated economic benefits.
Natural Resources – These include oil, natural gas, minerals and forests. Liability is something which a company owns to people or businesses other than its owners. Liability is a present obligation arising due to some past transactions and settlement of which is expected to result in future transfer of assets (may be in the form of cash) or performance of services. Generally, liabilities can be classified into two types based on when they are due: 1. ) Current Liabilities – Any liabilities or outgo of a payment which is to be made in the normal operating cycle (usually next 12 months).
Also known as the short term liabilities, this type includes the payments which are to be made to suppliers/vendors i. e. trade payables, short term loans, employee salaries etc. Current Liabilities can further be classified into a. Definite Liabilities – Can be determined precisely b. Estimated Liabilities – Also known as Provision, this is a liability of uncertain time and amount. 2. ) Long Term Liabilities – Any debt of a company which extends for more than a year will be categorized under long term liability.
This may include long term bonds issued by a company, notes payable, pension obligations etc. We can also classify liability on the basis of security available to the creditor in case of default. 1. ) Secured Liability – It is backed by a pledge, hypothecation or mortgage of borrower’s specific asset in favor of creditor. In case of default, creditor proceeds to settle the dues by selling the assets. 2. ) Unsecured Liability – This is incurred based on the borrower’s general credit standing, and the creditor has legal claim only against the borrower’s net assets.
Apart from above classifications, another type of liability is Contingent Liabilities. This is defined as a. ) Possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of entity. b. ) Or a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of obligation cannot be made.