Assets and Liabilities

Assets and Liabilities

Revenues, expenses, and profits are used to describe what your business does; assets and liabilities describe what your business owns and owes. Here's how they're defined:

• Assets. Assets are those items that you own. Assets can be in the form of physical things (land, buildings, equipment, fixtures), cash or cash equivalents, or accounts receivable. In short, anything you own or that is owed to you is counted as an asset.

• Liabilities. Liabilities are the opposite of assets; they're things that someone else owns and for which you owe. Liabilities are typically in the form of loans, expenses, or taxes due.

If you take everything you own and subtract everything you owe, the balance represents your net worth in your businessalso known as your equity. This equation is the core concept behind that financial statement called a balance sheet.

Again, a short example. Let's say that you have $300 in inventory sitting in your garage, another $100 in unused shipping boxes, plus you're owed $100 for closed auctions that the buyer hasn't paid yet. You also happen to have a whole $100 sitting in your business bank account. Add it all together, and that $600 total represents your assets.