Assets and Liabilities

Assets and Liabilities

 A professional account is responsible for the budgetary planning, analysis, bookkeeping, management, and reporting of an organization’s finances. Degree holding Accounting professionals are eligible for a CPA (certified public accountant) credential. As practice leaders, CPAs are qualified to oversee the accounting audit and internal account record of a firm, company, public administration, or other organization. Students working toward a degree in Accounting must demonstrate competency in higher mathematics skills (i.e., calculus) for financial statement analysis and market forecasting. Accounting students also learn the regulatory rules associated with U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Our tutors at 24HourAnswers are highly-qualified experts in the field of accounting and responsive to the college and university level learning requirements of students studying for an accounting degree. Our team of educated tutors are subject matter experts with the academic and professional knowledge to assist students in the completion of their accounting coursework and credentialing goals and objectives.

 Here are some insights from the field of Accounting about the topic ‘assets and liabilities':

The Balance Sheet

Accounting definition of assets and liabilities is established as part of a firm’s audited financial statements. Assets are property and liabilities are outstanding obligations to other parties, along with income and expense. Capital on the balance sheet refers to available assets once liabilities are settled. Periodic reporting of assets and liabilities is performed annually. The aggregate difference between assets and liabilities determines the degree of liquidity and equity or net residual ownership of a firm. If a business cannot pay its liabilities in full, its assets cannot be converted (i.e. sold) for cash.

Assets

The asset section of the balance sheet refers to resources owned and controlled by a firm. Assets acquired transaction or accessed in another way, are recognized within the financial statement as the “current” and “non-current” accounts from which economic benefit is expected to flow to the company. In simple terms, assets are properties or rights owned by the business.

Current assets held for the purpose of trading, are recognized as short-term resources to be realized as cash or consumed within a single period of one year after the end of a reporting period, or its annual operating cycle. Non-current assets are long-term resources useful for a term longer than a period of one year, or the firm’s annual operating cycle.

Current asset accounts on the balance sheet:

• Cash and Cash Equivalents – cash, checks, coins, funds held for current purposes.
• Receivables – accounts receivable, promissory notes, rents, interest, employee debts owed to an employer, and other claims.
• Inventories – material assets held for production use and sale.
• Prepaid expenses – overhead or paid in advance expenses (i.e., rent, insurance coverage, advertising, and supplies.
• Allowance for Doubtful Accounts – a contra-asset, valuation account reported as a deduction to the principal asset account, the line-item is based on uncollectible accounts receivables.

Non-current asset accounts on the balance sheet:

• Building – office, factory, laboratory, store, warehouse, or other facility.
• Land – property purchased for business operations not short-run resale.
• Equipment – computer equipment, delivery equipment, facility infrastructure or installation, factory equipment, office furniture, and other fixtures.
• Intangibles – long-term assets with no materiality (i.e., copyright, patent, trademark or pro bono goodwill).
• Accumulated Depreciation – a valuation account exhibiting decrease in value of a fixed asset in response to continued use, time, or innovation obsolescence. Considered a contra-asset account, it is a line-item deduction of a related fixed asset.
• Investments – portfolio of bonds, stocks, and other funds set up long-term or in perpetuity.
• Other long-term assets

Liabilities

The liabilities section of the balance sheet shows a firm’s financial obligations or outstanding payables owed. Assets are financed from two main sources: 1) borrowing from creditors or lenders; and 2) owner contributions. The former refers to liabilities and the latter to capital. Claims consented to by the owners against the assets of a company, liabilities are outstanding accounts owed to other parties. As with assets, liabilities line-items are listed as either current or non-current accounts.

Current liabilities accounts on the balance sheet:

• Trade and other payables – accounts, notes, interest, outstanding rent, and accrued expenses, etc.
• Short-term borrowings – loans, credit, or other short-term financing arrangements.
• Current provisions – the estimated short-term liabilities of a firm.
• Current-portion of a long-term liability – percentage of outstanding financing (e.g., loan installment payments) currently owed.
• Current tax liabilities – payable income tax for the current period.

Non-current liabilities accounts on the balance sheet:

• Long-term obligations - notes, bonds, and mortgage.
• Deferred tax liabilities.
• Other long-term obligations.Capital

The net assets or equity capital refers to retained earnings after all liabilities are settled. Capital is affected by initial or additional contributions and withdrawals by an owner or shareholder dividends, income, and expenses.

Balance Sheet Preparation

End of year assets and liabilities are reported on a firm’s balance sheet. One of the three main audited financial statements, the balance sheet, along with the income statement and cash flow statement, reports the liquidity or overall financial solvency of a company. The audited financial statement applies the following formulae to estimate Assets, Shareholders’ Equity, Retained Earnings and Net Income for a reporting period:

Assets = Liabilities + Shareholders’ Equity

Where

Shareholders’ Equity = Assets = Liabilities + Contributed Capital + Retained Earnings

And

Retained Earnings = Assets = Liabilities + Contributed Capital + Retained Earnings, Beginning of Period + Net Income for Period – Dividends for Period

And

Net Income for Period = Assets = Liabilities +Contributed Capital + Retained Earnings, Beginning of Period + Revenues for Period – Expenses for Period – Dividends for Period

Adjustments to the balance sheet accounts are accounted for in calculation of the cash flow statement. For instance, a change in plant, property, and equipment (“PPE”) assets, is equal to capital expenditure minus depreciation expense.

 Modeling Financial Performance

Financial analysis applied in the mathematical modeling of the main financial statements. Estimates involve balance sheet assets and liabilities, along with income statement and cash flow statement items. Performance metrics determine the liquidity, leverage, efficiency, and rates of return. Here are examples of financial performance metrics applied to statement analysis prior to audit and for purposes of capital structure analysis for reporting to investors.                                                                            

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Bibliography

“Balance Sheet.” Accounting For Management.org nd.  

“Elements of Accounting: Assets, Liabilities, and Capital.” Accounting Verse nd. 

Kopp, Carol M. “Financial Modeling.” Investopedia 31 Oct 2020. 

“The difference between assets and liabilities.” Accounting Tools 12 Dec 2020. 

“What is the Balance Sheet?” Corporate Finance Institute nd.