What Is Assets And Liabilities With Examples In Balance Sheet?

Understanding the difference between assets and liabilities is crucial for interpreting a balance sheet, a financial statement that summarizes a company’s or individual’s financial health at a specific point in time.

Assets:

• Definition: Assets represent economic resources owned by a company or individual that have the potential to generate future cash flow. In simpler terms, these are things you own that have value.
• Examples:
  • Current Assets: These are assets that can be easily converted into cash within one year. Examples include:
    • Cash and cash equivalents (coins, bills, checking accounts)
    • Accounts receivable (money owed by customers for goods or services)
    • Inventory (goods held for sale)
    • Prepaid expenses (expenses already paid for a future benefit)
  • Non-Current Assets: These are assets that are not expected to be converted into cash within one year. Examples include:
    • Property, Plant, and Equipment (PP&E) (land, buildings, machinery)
    • Intangible Assets (patents, trademarks, copyrights)
    • Long-term investments (stocks, bonds held for more than a year)

Liabilities:

• Definition: Liabilities represent financial obligations that a company or individual owes to another party. These are debts that need to be repaid in the future.
• Examples:
  • Current Liabilities: These are debts that must be repaid within one year. Examples include:
    • Accounts payable (money owed to suppliers for goods or services)
    • Salaries payable (wages owed to employees)
    • Short-term loans (loans due within one year)
    • Accrued expenses (expenses incurred but not yet paid)
  • Non-Current Liabilities: These are debts that are not due within one year. Examples include:
    • Long-term loans (mortgages, bonds payable)
    • Deferred revenue (unearned income received in advance)

Balance Sheet Relationship:

A company’s balance sheet follows the fundamental equation:

• Assets = Liabilities + Shareholders’ Equity (Owner’s Equity)

• Shareholders’ Equity (Owner’s Equity): This represents the difference between a company’s assets and liabilities. It reflects the owners’ investment in the company.

Example:

Imagine a small bakery owner creates a balance sheet:

• Assets:
  • Cash: ₱10,000
  • Inventory: ₱20,000
  • Equipment: ₱50,000
• Liabilities:
  • Accounts payable (flour supplier): ₱5,000
  • Loan payable (oven purchase): ₱20,000
• Shareholders’ Equity: ₱35,000 (₱80,000 Assets – ₱45,000 Liabilities)

In this scenario, the bakery has more assets (₱80,000) than liabilities (₱45,000), indicating a positive financial position. The owner’s equity (₱35,000) reflects their investment in the business.

Simplified Balance Sheet Example