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Assets and liabilities are core concepts in accounting that aid in assessing a company's financial position. They are the primary elements of the balance sheet.
Assets
Assets represent resources owned by a company that are anticipated to yield future profits, whether tangible or intangible.
Examples of assets include:
Cash and cash equivalents: Currency, bank deposits, and other highly liquid assets.
Investments: Stocks, bonds, and other securities.
Property, plant, and equipment: Buildings, machinery, and vehicles.
Intangible assets: Patents, copyrights, trademarks, and goodwill.
Accounts receivable: Money owed to the company by customers.
Inventory: Goods held for sale.
Liabilities
Liabilities are obligations or debts that a company owes to external parties, typically settled by transferring economic benefits like money, goods, or services.
Examples of liabilities include:
Accounts payable: Money owed to suppliers for goods or services.
Notes payable: Short-term or long-term loans.
Accrued expenses: Expenses incurred but not yet paid.
Long-term debt: Bonds, mortgages, and other long-term obligations.
Deferred revenue: Amounts received in advance for goods or services to be provided in the future.
The Accounting Equation is a fundamental principle stating Assets = Liabilities + Equity. This equation underscores that a company's total assets must equal its total liabilities plus equity (the owner's share in the company).
In essence, assets are what a company owns, and liabilities are what a company owes. The difference between the two is the company's equity. A company with more assets than liabilities is considered financially healthy, while a company with more liabilities than assets may be in financial trouble.
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