Assets and Liabilities

ACCOUNTING

The subject of accounting is the calculation of the financial results of an economic entity's business activity.

Accounting can show the managers or owners of a business whether or not the business is operating at a profit, whether or not the business will be able to meet its commitments as they fall due.

Accounting is based on the accounting equation, which states that a firm's assets must equal its liabilities plus its owners' equity.

Things of value or earning power to a firm are its assets.

Current assets include cash, receivables, bank deposits, and trade investments: investments in other companies.

Fixed assets include land, plant, buildings, and furniture.

Intangible assets may include such things as patents owned by the company, and goodwil l. the value of the company as a functioning business or going concern with a client base, experienced management, and other benefits that a start-up may not have. Assets arise from past events, which may be cash or non-cash transactions. Assets may be purchased, exchanged for other assets, self-generated or received as grants or donations. An asset is recognized when it is reasonably certain that the future economic benefit embodied in it will flow to the enterprise.

Assets such as plant and equipment that over time wear out or become outdated are said to depreciate. A charge must be made for this depreciation or amortization in calculating a business's profitability: the assets are depreciated or amortized by an amount each year.

The book value of an item of equipment is the amount it is theoretically worth after depreciation, but this may not reflect what someone would pay for it if it was sold.

Debts to lenders form part of a company's liabilities.

Liabilities are also used to refer exclusively to debt. Long-term debts are long-term liabilities.

Short-term debts and debts to suppliers are among its current liabilities.

Equity is a residual arising from the deduction of liabilities from the assets of the reporting enterprise. Equity arises from two sources: that provided by shareholders (for example, paid-in capital) and that generated by the activities of the enterprise (for example, earnings less distributions to shareholders, unrealized surpluses).

The ratio of a firm's debt to its equity is its gearing or leverage; a firm with a high propotion of debt in relation to equity is highly geared or highly leveraged. (Note! The term gearing is used mainly in Br.English and leverage in Am.English).

Assets

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