Assets are economic resources as a result of past events having the potential to provide cash inflows to the entity. But Liabilities are present economic obligations of which cash must move out of the entity. What’s the differences between assets and liabilities? The article will dive into it.
Ten (10) Differences Between Assets and Liabilities
Below are list of items that can be used to camp are both accounting terms:
Definition: Assets are properties or economic resources of a business. Liabilities are money the business owed outsiders or economic obligations to other persons and entities.
Events: Assets arise from past events. Liabilities arise from current obligations based on past events.
Cash flow: Assets have the potential of making cash inflow to the organisation (cash inflow). Liabilities, on the other hand, will move cash out of the entity (cash outflow).
Double Entry: Assets are debited when its value increases and credited when its value reduces. However, liabilities arise when its value decreases and credited when it increases in value.
Accounting Equation: Assets equals Capital + Liabilities. But, Liabilities equals Assets – Capital.
Depreciation: Assets reduce in value except for land. Liabilities do not reduce in value. The obligation must be paid.
Inflation: Inflation may increase the value of an asset. Example, the value of land and building increase over time due to changes in the prices of goods and services. However, liabilities reduce in value over time. This is because the purchasing power of 1 Naira now will reduce shortly due to inflation.
Impairment: Assets can easily be impaired. Debtors failure to pay their debts may lead to impairments in the value of Account Receivables balances.
However, the impairment does not affect liabilities. Failure of the company not to pay its debts will enable the company to used such funds to meet other business needs. The consequence is that the creditors will force the entity to repay their debts or face litigation.
Position in Statement of Financial Position: Assets appear in the top lines on a statement of Financial Position. While Liabilities appears at the bottom lines.
Types: Assets are of various types. This includes Property, Plants and Equipment (PPE), Financial Assets, tangible and intangible assets among others. However, the general classification of assets as current and noncurrent assets. On the other hand, Liabilities are majorly classified as current and noncurrent liabilities.
From the above, ten items have been used to distinguish or differentiate between assets and liabilities. The common ones are definitions, double-entry, depreciation, cash flow, impairments, inflation and types.