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Financial literacy
8 min

Bookkeeping Basics: Assets And Liabilities Explained

Learn what assets and liabilities are and how they shape your small business balance sheet.

Published at | Updated:
A businessman creating a balance sheet

Key takeaways

  • Recognize that assets are what your business owns and liabilities are what it owes.
  • Sort assets and liabilities into current and non-current to gauge your short-term cash position.
  • Track both sides of your balance sheet to see whether you own more than you owe.
  • Review your balance sheet regularly to guide decisions on spending, investing, and growth.

What’s a balance sheet?

A balance sheet is a financial statement that summarizes what a business owns and owes. Public companies must file one with the SEC each quarter, but most small businesses prepare a balance sheet for their own management, lenders, or taxes rather than as a legal filing requirement. It provides a quick view of a business’s financial situation by listing its assets and liabilities, two of the most fundamental indicators of a business’s financial health.

Assets are anything the business owns that can produce future economic benefits. Liabilities, on the other hand, are anything a business owes. This could be money, equipment, or services. Simply put, a successful company has more assets than liabilities.

A correctly filled balance sheet allows owners, bookkeepers, stakeholders, and auditors to quickly assess a company’s past, current, and future equity. In other words, it makes it easy to calculate how much money the business is worth by using the common equation:

Total Assets – Total Liabilities = Equity

What are assets?

In short, anything your business owns that has monetary value is considered an asset. The two main types of assets are tangible and intangible.

Tangible assets

Physical or quantifiable objects with a clear financial value are considered tangible assets. They go on your balance sheet and are divided into two main categories: current assets and non-current assets.

Current assets are tangible items a company expects to turn into cash within 12 months.

Examples of current assets include:

  • Physical cash
  • Money in the company’s checking account
  • Inventory
  • Raw materials
  • Accounts receivable (AR)
  • Signed contracts for future short-term projects

Non-current assets are tangible items you do not expect to turn into cash within a year. They are long-term holdings that are not meant to produce profit soon.

Examples of non-current assets include:

  • Real estate, assuming your business is not selling or renting it out: offices, stores, land, or factories
  • Company vehicles
  • Equipment and machinery
  • Office furniture
  • Stocks and bonds

Intangible assets

Assets that are not physical objects you can touch or count are considered intangible assets. While they have monetary value, which affects the company’s worth, it is often difficult to quantify.

For this reason, they are typically not included in the balance sheet, especially for small businesses.

Examples of intangible assets include:

  • Business reputation
  • Logo and brand
  • Customer lists
  • Partner networks

Are consumables assets?

We’ve already established that things owned by a business are considered assets, but that doesn’t mean everything in your office should be listed as one. A good rule of thumb is that if something cannot be sold or otherwise realistically liquidated and turned to cash, it shouldn’t be listed as an asset on your balance sheet.

So, if you happen to sell coffee beans for a living, go ahead and list them as inventory, which is definitely an asset. But, if you just have a two-pound bag of beans for your morning brew, we suggest you leave it out of your balance sheet.

What are liabilities?

Liabilities are everything a business owes, whether it’s money, labor, or goods. All liabilities must be included in the balance sheet and divided into two main categories: current and non-current liabilities.

Current liabilities

Current liabilities are debts a company plans to clear within the next 12 months.

Examples of current liabilities include:

  • Outstanding bills, aka accounts payable (AP)
  • Accrued expenses
  • Deferred income, in other words, goods or services already paid for but not yet delivered
  • Current portion of long-term debt
  • Employee salaries
  • Taxes

Non-current liabilities

Non-current liabilities are debts that will not be covered within a year.

Examples of non-current liabilities include:

  • Long-term lease obligations
  • Long-term loans
  • Commercial mortgage
  • Non-current accrued expenses
  • Non-accrued expenses

Assets vs. liabilities: what’s the difference?

The difference is simple. Assets add value to your business, while liabilities are what you owe. Here is how they compare.

  • Assets: resources you own that hold or create value, like cash, inventory, and equipment.
  • Liabilities: debts and obligations you need to repay, like loans, unpaid bills, and taxes.

A healthy business tends to own more than it owes. Watching both sides helps you spot when debt is growing faster than what you own.

How assets and liabilities work together on your balance sheet

Your balance sheet brings assets and liabilities together in one place. It uses a simple equation to show what your business is worth.

Subtract total liabilities from total assets and you get equity, which is the value that belongs to you as the owner. Tracking this shows whether you own more than you owe over time.

When liabilities grow without a matching rise in assets, that is a sign to slow down and review your spending.

How this applies to a small business like yours

Every business, regardless of size, has both assets and liabilities that must be listed and reported. Still, they vary according to industry, business type, and stage of growth.

To help illustrate what this looks like, here are a few examples of businesses and what some of their assets and liabilities are likely to be. For simplicity and clarity, we only covered assets and liabilities that need to go on a balance sheet, leaving out intangible assets.

A corner pizzeria’s assets and liabilities

Current assets: ingredients to make 1,200 pizzas, soft drinks inventory, 12 wine cases, five beer kegs, cash in the register, an unpaid invoice for 50 pizzas sold to a local business customer (net 30 terms), 1,500 pizza boxes, and daily fresh toppings deliveries, paid through until the end of the quarter.

Non-current assets: two stone ovens, a 250 square feet restaurant space with a storefront, kitchen equipment, utensils, six dining tables, 18 chairs, a commercial dishwasher, and two delivery scooters.

Current liabilities: an unpaid bill for sauce, mozzarella, and vegan cheese, this month’s payroll for a staff of six, sales and employment taxes not yet remitted, an invoice for oven repair, and a bill for a new website design.

Non-current liabilities: commercial mortgage on the restaurant space, a 36-month loan to purchase an additional scooter, liquor license fee.

A freelance web designer’s assets and liabilities

Current assets: money in a checking account, undeposited checks for a recent website designed for the corner pizzeria, and payments due from three other customers.

Non-current assets: a laptop, a stylus pen, a professional tablet, two large screens, an ergonomic mouse and keyboard set, an adjustable standing desk, and a cell phone.

Current liabilities: internet, phone, and electric bills, taxes collected but not yet remitted, and a bill for professional tax filing by an accountant.

‍Non-current liabilities: 18-month financing plan for a new laptop, a $20,000 loan taken out to start the business.

A home renovation business’s assets and liabilities

Current assets: lumber, construction equipment, painting supplies, two signed contracts for building backyard decks, and 10 uncashed checks from customers amounting to $95,000.

Non-current assets: three company vans, two laptops, four walkie-talkies, a five-year contract with a local school for maintenance services.

Current liabilities: payroll and taxes for four employees, rent for office and storage space, a bill for repairing a flat tire on one of the vans, and business and third-party insurance.

Non-current liabilities: long-term credit used to buy equipment and supplies in bulk and 24 payments left on a used-van purchase.

Managing your assets and liabilities with Melio

Even if you have an accountant who does the heavy lifting for you, knowing how to prepare a balance sheet is a valuable skill for your business and for you as an entrepreneur. It gives you a better picture of where your business stands and its most pressing challenges. It can also help you figure out where to invest more and where to downsize.

Now that you have a better idea of what assets and liabilities are, you can start creating balance sheets to get a better perspective on your business.

And, if you need a simple tool to manage your incoming and outgoing payments, you can simply sign up for Melio today. It’s free.

Assets and liabilities FAQs

What is an example of an asset and a liability?

Cash in your business checking account is an asset. A loan you took out to buy equipment is a liability.

What are common small business assets and liabilities?

Common assets include cash, inventory, equipment, and unpaid customer invoices. Common liabilities include unpaid bills, payroll, taxes, and loans.

Is a company car an asset or a liability?

A company car you own is a non-current asset. If you financed it, the remaining loan balance is a liability.

Is a business loan an asset or a liability?

A business loan is a liability because it is money you owe. The cash you receive from it is an asset until you spend it.

*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.

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