Assets and liabilities: what's the difference between these two pillars of the balance sheet?
Assets and liabilities are two terms we often hear about when we talk about accounting. But do you know exactly what they cover? What is the composition of assets and liabilities in the balance sheet?
Focus on these two concepts, two sides of the same coin.
Definition: assets and liabilities
Assets and liabilities are the two parts of the balance sheet:
- they bring together all the company's accounting entries for a given period, called the financial year;
- they present the assets and liabilities of the commercial enterprise in summary form.
In the balance sheet, assets and liabilities must always be equal.
What are assets in accounting?
➕ In accounting, assets represent everything a company owns: its property and rights.
Assets therefore list everything that :
- has created value to help the company operate ;
- is in the process of creating value ;
- or will create value in the future.
Assets are located in the left-hand column of the balance sheet.
What are liabilities in accounting?
➖ In accounting, liabilities represent everything the company owes. In other words, it has a negative economic value because it induces an outflow of resources.
It lists the resources that enabled the company to finance the assets.
Liabilities are located in the right-hand column of the balance sheet.
💡 Please note: the General Chart of Accounts (PCG) details all the accounts and accounting entries to be shown on the balance sheet.
Composition of assets
Fixed assets
Fixed assets are all the company's long-term investments which are intended to remain with the company and create lasting value. They are located at the top of the balance sheet.
There are three types of fixed assets:
| Type of fixed asset | Definition | Example |
|---|---|---|
| Intangible fixed assets | These are non-material assets that cannot be touched. | Software, patents, goodwill, etc. |
| Tangible fixed assets | These are tangible assets intended for use in the company's production. | Building, car, tools, computer, etc. |
| Financial assets | These are financial assets intended for long-term use. | Equity interests in other companies, guarantees, etc. |
Current assets
Current assets are items that are not expected to last the company's lifetime; they are more "liquid". They are located at the bottom of the balance sheet.
These assets are necessary for the company to continue as a going concern, and include :
- inventories and work-in-progress ;
- receivables: money owed to the company by customers or suppliers, for example;
- cash and cash equivalents: money available in the company's bank accounts, as well as marketable securities, for example;
- prepaid expenses.
Composition of liabilities
Non-current liabilities, or shareholders' equity
At the top of the balance sheet, in the right-hand column, you'll find shareholders' equity, made up of :
- share capital: the contribution made by associates and shareholders when the company was created, or through a capital increase ;
- reserves: profits not distributed as dividends and available to the company;
- retained earnings: profits not distributed as dividends, or losses from previous years, the appropriation of which will be determined at a future financial year;
- profit for the year : the creation or loss of wealth, depending on whether the result is positive or negative.
Current liabilities, or debts
Lastly, at the bottom of the balance sheet are current liabilities, i.e. the company's debts:
- financial debts: to banks, shareholders or credit institutions,
- trade payables,
- tax liabilities,
- social debts.
💡 Why are debts considered as resources in accounting? Because debts represent sums that have not yet left the company's accounts from an accounting point of view, so they are money that is still available.
Article translated from French