What is Assets and Liability and its Types || Importance of Assets and Liabilities

What is Assets and Liability and its Types || Importance of Assets and Liabilities

Whenever we talk about investing, we talk about company analysis, then before investing in any company, there are many things that we have to analyze. One of them is the balance sheet, through which we get to know the actual financial health of the company. 

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Before analyzing the balance sheet, it is necessary for any person to know about its basics, which are assets and liabilities. Because both these are the real components of the balance sheet. So today we're going to talk about,

  1. What is assets and liabilities.
  2. And what are the types of assets and liabilities.
  3. What is their importance in any company.

What is Assets.

So the profitability of any company depends on its assets and liabilities, and along with this, how efficient the company is able to manage assets and liabilities. 

If we talk in a broader way, all the receivables of the company are in the asset category and all the payables are in the liability category. So let's now understand both in detail one by one. 

So first of all let's talk about assets, then generally we talk about all those things from which we can generate some revenue in future. Be it in long term or short term. 

Assets are those resources through which we can reduce our expenses and enhance profitability so that our cash flow statement remains good, and assets play an important role in the balance sheet as well,

Types Of Assets.
  • Convertibility, which consists of fixed assets and current assets.
  • Physical Existence, which consists of Tangible assets and Intangible assets.
  • Purpose, which consists of operating and non-operating assets.

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1. Current Assets

We can also call Current Assets as Short Term Assets or Liquid Assets. So these are the type of assets of the company which we can immediately convert into cash, within a year. For example,

  • Stocks.
  • Inventories
  • marketable securities
  • Accounts Receivables
  • Or any type of Prepaid Expense
All these are the category of Current Assets. By looking at the current figures of any company, we can understand that how much Liquidity is there in that company.

2. Fixed Assets or Long Term Assets

So these are the type of assets which we cannot convert into cash immediately. For example,

  • Land
  • Machinery
  • Equipment
  • Buildings
  • Patents
  • Trademarks
3. Tangible Assets

In Tangible Assets, we consider those assets which we can see and touch. such as,

  • Land
  • Buildings
  • Equipment
  • Inventories
  • Machines
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All these are assets that we can see and touch. So the opposite is true for those things which we cannot touch or see but can feel around us, which are Intangible assets. such as,
  • Good will
  • Patent
  • Copyright
  • Permit
We cannot see all these things but we can definitely feel them. Because all these things also have an economic value and cash is generated when they are sold.

Operating Assets

This includes all those assets in which the company generates revenue directly. Through which the day-to-day functioning of a company is run. 

For example, if there is a company that manufactures certain products through certain machines. 

Those machines became his operational assets for the company. Since their products are made because of that machine, and its sale brings revenue to the company.

Non Operating Assets

It includes all the assets which are not responsible for the daily revenue generation of the company. 

But some other kind of revenue of the company is generated and given. For example, if a company has made an FD and whatever interest income it earns, it becomes their non-operating profit. 

Because their job is not to make fixed deposits. Their job is to prepare products through machines. So this interest on FD is his non operational asset.

What are Liabilities.

Generally, all payables come under liability. This is an obligation on any company. 

It is very important for them to meet their liabilities. 

From liability we get to know how much money the company has taken from outside and more than half of the financial position of the company depends on how efficient they are managing their liabilities.  Like assets, there are many types of liabilities in any company like,

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Types of Liabilities
  • Current Liability.
  • Non current liability.
  • Contingent Liability.
Current Liability

It includes all types of liabilities which are of short term. That is, those which we have to pay off within a year, such as,

  • Creditors.
  • Bank overdraft.
  • Any Short Term Outstanding Bills.

Non Current Liability

This includes all those applications which are for long term, which means we have to pay after one year, and generally long term liability company takes it when there is an expansion or a fixed deposit. 

Purchase has to be done, in which a lot of huge capital is going to be used. Then any long term loan, debenture, bonus, payable by the bank, all these things will come in long term liability.

Contingent Liability

This is such type of liability, which may or may not happen in future. So for this we have to keep a provision in advance. 

For example, if a legal case is going on against a company, if it loses, the company will probably have to pay a huge penalty, then they will already start depositing the penalty money so that if they lose the case, they will be able to comply with that provision. Payoff your penalty with money.

Importance of Assets and Liability.

Now we have understood each type of assets and liabilities, from which it is known that how important both are for the companies. 

Even in company analysis, many times we also need to see how much is the total assets or total liability of the company. On which the financial health of the company is known.

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