Assets are the resources owned by a company that has future economic value that can be measured and can be measured in monetary terms.
An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it’s manufacturing equipment or a patent.
Examples of assets include investments, accounts receivable, supplies, land, equipment, and cash.
A liability, in general, is an obligation to, or something that you owe somebody else. Liabilities are defined as a company’s legal financial debts or obligations that arise during the course of business operations.
These are recorded on the right side of the balance sheet.
They are categorized into two types current and noncurrent liabilities. Current liabilities are obligations to be paid within 12 months while non-current liabilities are obligations to be paid beyond 12 months. The most common liabilities are usually the largest like accounts payable and bonds payable.
Equity is found on a company’s balance sheet and is one of the most common financial metrics employed by analysts to assess the financial health of a company.
Equity basically represents the shareholders’ equity or net worth of the company as assets with fewer liabilities equals net worth.
Equity has relevance as it represents investors’ stake in the securities or company. Equity is used as capital for a company, which could be to purchase assets and fund operations.
Stockholder equity has two main sources. The first is from the money initially invested in a company and additional investments made later.
Accounts payable form the largest portion of the current liability section on the company’s financial statements. It represents the purchases that are unpaid by the enterprise.
In the cash conversion cycle, companies match the payment dates with accounts receivables making sure that receipts are made before making the payments to the suppliers.
The lower the accounts payable days the better. It reflects that the company is able to realize the cash in a good fashion.
An example would be: The Bold Fashions Ltd bought textile garments from Sri Textile traders as raw materials on credit. The Bold Fashions here got the inventory as a current asset while creating a short-term obligation on the other hand.
Accounting treatment in Financial Statements
Taking the cue from the accounting equation, the assets are the sum of liabilities and capital. Liabilities are shown on the balance sheet in two portions: current liabilities and noncurrent liabilities.
|Liabilities and capital||Amount ($)||Assets||Amount ($)|
|Shareholders’ equity||X||Non – Current Assets||X|
| Other current Liabilities|
The nature of accounts payable matches with current liabilities. The common characteristics below conclude why accounts payable are within current liability:
- Both are short-term obligations to meet within the year.
- Accounts payable is a subset of current liability.
- The major portion of working capital requires the management of accounts receivable and accounts payable, both contributing to a healthy cash conversion cycle and so do current liabilities as a whole.
- Both accounts payable and current liabilities are the results of a past transaction that obligates the entity.
Current liabilities are one of two-part of liabilities and hence, accounts payable are liabilities. The nature of accounts payable does not match with those of assets or equity in nutshell.