Assets,Liabilities & Shareholder's Equity

Updated: Oct 17, 2020


Assets

In accounting, assets are things that an economic entity owns and controls in order to derive benefit in the form of increasing the firm’s value or benefit the firm’s operations by generating cash flow, increase income or reduce expenses.

There are 2 types of assets: Current assets and Non-Current Assets




There are 2 types of non-current assets: Tangible and Intangible





Non-current assets (or fixed assets) are depreciated (for fixed assets) or amortized (for intangible assets), meaning the cost is allocated over the useful life of asset. It also represents the decrease in the value of the asset due to the wear and tear.


The three methods that are generally used for the calculation of depreciation are Straight-Line method, Declining Balance or Written Down value method and on the basis of units of production.



Some assets also increase in value over time due to various reasons, for example, it is common for trademarks to increase in value due to a rise in brand recognition. This increase in the recorded value of assets is called appreciation.


Liabilities

In accounting, liabilities are things that an economic entity owes. These are obligations that the entity needs to meet as a result of past transactions or events.

There are two liabilities: Current and Non-Current




Current liabilities usually represent the owed for operating activities or current portion of long-term obligations. While non-current liabilities usually represent the amounts borrowed for the long-term to meet the capital expenditure or for investment purpose.


Assets add value to the entity and they contribute in increasing the equity value. Whereas, the liabilities decrease the equity value. The more assets the business has, the stronger is its financial health. A business with more liabilities is likely to be under more risk.


Contingent liabilities are liabilities that depend on an uncertain future event in order to actually become a loss or an amount payable and are recorded off the balance sheet as a foot-note. This kind of liability is recorded if the contingency is likely to occur and the amount payable can be reasonably estimated.


Example: potential or long-pending law suits, claims for warranty, pending investigations, letters of credit issued, etc. The reason why contingent liabilities are provided for is that they help the business assess the situation and be ready for any outflow that might happen in the future. The reason why they are written off the balance sheet is that it these do not necessarily result in an outflow.

In the financial statements, assets and liabilities appear in the balance sheet. However, contingent liabilities are recorded off the balance sheet as a foot-note.


Shareholder's Equity

Shareholders equity is the amount that shows how the company has been financed with the help of common shares and preferred shares. Shareholders equity is also called Share Capital, Stockholder's Equity or Net worth. It also represents the shareholder’s residual claim on assets after liabilities have been paid.


​Shareholders’ equity = Total assets − Total liabilities​

Shareholder’s equity comprise the amount paid by the shareholders to get the shares of the firm and retained earnings. Retained earnings are that part of the profit that have not been paid to the shareholders as dividends.

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