Asset Liabilities – Their Financial Application and Usefulness

 

Keywords – Asset Liabilities

We were surprised to find out that 690 people a month search for asset liabilities. 

This was a surprise because there is no collective term “asset liabilities”. However, assets and liabilities are closely connected. 

Basic Accounting Explanation

At the most basic level, ‘assets’ are what you own. On the other hand, ‘liabilities’ are what is owed to others. 

For example, if you acquire a new car for your business for £25,000; pay £5,000 with cash; and borrow £20,0000; your assets are worth £25,000 and liabilities £20,000. The other £5,000 that you paid in cash is the equity. In the form of an equation; specifically the fundamental accounting equation; this can be represented as:

Assets = Liabilities + Equity

In some cases, the equation is also written as:

Equity = Assets – Liabilities

For an organisation, the equity in the equation becomes shareholder or owner’s equity. Similar conversions are also available for the inclusion of debits, credits, capitals, and earnings

So, how is this information applied to financial statements and bookkeeping?

Application

The equations presented above, and their extensions, form the basis of bookkeeping practices. 

In other words, financial reports, including the general ledger of an organisation, are based on the basic principles of assets and liabilities, and their extensions. 

The said equations are also usable in evaluating a company, calculating investments and returns, and other accounting practices.

So, how is this different from cash flow?

Difference from Cash Flow

A cash flow statement simply shows the movement of money in and out of an organisation. In other words, a cash flow statement represents how well a company is doing.

On the other hand, a balance sheet, where the assets and liabilities are presented, is a summary of the financial balances of an organisation. 

Please be aware that a balance sheet does not clarify how well an organisation is performing. Therefore, the sheet holds little value for stakeholders and investors. 

To learn more, get in touch with us today. 

And, to find out about financial and bookkeeping services, please click here.

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