Assets and Liabilities

Meaning of Assets and Liabilities

The terms assets and liabilities refer to the accounting and balance sheet . Assets, i.e. the assets side, shows which assets are available to the company that can ultimately be actively worked with. The liabilities side, i.e. liabilities, on the other hand, shows how the company’s assets were financed – either with equity or with liabilities (credit). There are various active accounts on the assets side and various liability accounts on the liabilities side.

Assets and liabilities: this is where they differ

Anyone who has to deal with the bookkeeping and balance sheet within their company will always encounter the two terms assets and liabilities, because every balance sheet has an asset and a liability side. The sum of the active (assets) side always corresponds to that of the passive (liabilities) side.

The passive side of the balance sheet shows where the funds that are available to the company come from. The active side, on the other hand, provides information about the purposes for which the company is using the funds. This explains the fundamental difference between assets and liabilities.

Note 1: In some cases, the assets are referred to as assets and liabilities as capital!
Note 2: The active inventory accounts are derived from the assets and the passive inventory accounts for financial accounting are derived from the passive ones ! It also depends on which page of the corresponding accounts the opening balance is listed and how the increases and decreases must be posted.

How are assets and liabilities made up?

According to GRADCHEM.COM, the commercial law structure of the balance sheet is regulated by the HGB (Commercial Code). The assets are classified according to their creditworthiness , which means that the positions that are particularly difficult to liquidate are at the top.
Fixed and current assets are summarized on the active side (assets). It must be noted that the company’s fixed assets are always fixed for the long and medium term, in contrast to current assets , which are only fixed for the short term.

Examples of fixed assets : These include, for example, intangible assets such as rights and licenses, tangible assets such as buildings, machines and land, but also long-term financial assets such as certain securities and company investments. It is different with current assets. This includes inventories such as raw materials or goods, but also liquid funds such as cash on hand and bank balances as well as receivables and securities.

The liabilities side is broken down and is based on two principles. A distinction is made here between equity and liabilities. Within these positions there is a breakdown according to the term.

Depending on the legal form of the company, equity includes subscribed capital or share or share capital. These are the shares of the company owners and their reserves. The annual surplus or the deficit can also be found here . If the balance sheet is drawn up as part of an appropriation of earnings, then the net profit or loss is also listed here.

On the liabilities side, after the equity, there is first of all the item of provisions , such as the expected tax payments. The difference here is that the provisions are not allocated to equity. The provisions are posting items that are created for liabilities that already exist, but for which the amount and due date have not yet been determined. So what is not definitely an obligation is also recognized as a provision.

Ultimately, the liabilities also belong to the current assets, such as liabilities arising from deliveries and services or due to banks. Other examples of provisions include future pension payments or taxes.

In addition to these balance sheet items, there are also so-called prepaid expenses, which can be found on both sides ( assets and liabilities). These come about when payments have arisen and can be allocated from another financial year , but not the associated expense or income.

Assets and Liabilities