Classification of Assets and Liabilities
Assets may be defined as the resources, properties, or possession of a firm. They are owned by a business and are expected to be of some future benefits. e.g. Land and Building, Furniture and Fittings, Motor Van, Cash, Bank and Stock of goods, etc. Assets can be divided into current and fixed assets.
(i) Fixed Assets: These are assets which are permanent or liquid in nature and it creates revenue for the business. They are long-lasting assets. They are acquired for use within the organization and not for sales to the customer. e.g. Land and Building, Machinery and Plant, Furniture and Fitting, Premises, Equipment, etc.
(ii) Currency Assets: These are assets that can last for a short period of time for the purpose of conversion in the ordinary course of business. e.g. Stock of goods, Cash in Land, Cash at Bank, Debtors, Bills receivable, Prepaid expenses, etc.
(iii) Tangible Assets: These are assets that can be seen or touched, have physical shape or identity and existence such as Land, Cash, Inventory. Thus Tangible Assets can be both non-Current assets and Current Assets.
(iv). Intangible Assets: These are assets which have no physical substance or properties but contribute to the economic benefits of the organization. It can not be seen or touched. e.g. Goodwill, Trademark, Patent, Copyright, etc.
(v). Liquid Assets: These are assets which can be easily converted in cash e.g. Investments, Securities, etc.
(vi) Fictitious Assets: These are assets of unusual character, which resembles those of assets. They are merely debit balances which are not realizable e.g. Preliminary expenses.
(vii) Wasting Assets: They are assets that are used up over a period of time. They become exhausted through being worked upon. Examples: Mines, Timber, Crude oil, Tin, Gold, etc.
Liabilities are obligations arising from past transactions. It is a claim by the outsider on the assets of the business. It is also the indebtedness of an organization to outsiders. e.g. Debenture, Loan, Overdraft and Creditors, etc. Liabilities are grouped as follows:
(i) Long-Term Liabilities: These are liabilities which becomes due for settlement after more than one year. They are liabilities which are payable in the future e.g. Debentures, Bond, Loan, etc.
(ii) Current Liabilities: These are liabilities which are payable within a short period of time usually a year. e.g. Creditors, Overdraft, Loan, Accrued Expenses.
Capital is the original money invested in a business by the owner. It is also referred to as net worth or owner’s equity. Capital is grouped as follows:
(i) Equity Capital: This is the amount contributed by the shareholders plus any retained earnings.
(ii) Loan Capital: This is the total amount of money the business borrowed from external sources e.g. Debentures and bonds.
(iii) Working Capital: This is the excess of current assets over the current liabilities. It is the Capital required for the day to day running of the business.
(iv) Overtrading: It means that the organization has no working capital to meet its obligation.
(v) Capital Employed: This is the excess of total assets over current Liabilities.