What are assets, liabilities and owners equity?

To understand a company's financial soundness you need to know what assets, liabilities, and owners' equity are.

Assets, liabilities and owners' equity are the three components that make up a company's balance sheet, and it is this balance sheet that gives you the little snap shot of how secure, or insecure the company is financially.

Generally when these terms are used they are done so in this equation: Assets = Liabilities + Owners' Equity

Every transaction of a company whether it is money coming in or going out should be recorded, and it is these recordings that make up what your assets, liabilities and owners' equity are. Generally on a balance sheet assets get recorded on the top or the left side; liabilities and owners' equity are recorded on the bottom or the right side of the balance sheet.
While your specific assets, liabilities and owners' equity will be unique to your company, we can take a look at what is generally included in these three areas:
1. Assets: by definition assets are anything of value that your company owns. These generally include the following:
a. Current assets. These are assets with dollar amounts that change regularly, so that would mean cash, accounts receivable, inventory or raw materials.
b. Investments. These are sometimes lumped under the same category as current assets, as they are similar to having cash. These include securities such as stocks and bonds, or even property.
c. Capital assets. Think of capital assets, as permanent things your company owns. So, land, buildings, equipment like computers, machinery etc. Even furniture and appliances are considered capital assets.
d. Intangible assets. These are assets that are not physical, but still hold weight, such as patents, copyrights and other nonmaterial assets that have value. These can be really big, brand names carry a lot of weight.
2. Liabilities are defined as anything a company owes. So, whether this is owed to people that work for you, such as salary, or wages, or whether it is debts, this is liability. There are really only two types of liabilities:
a. Current liabilities. This pretty much means things that are owed that must be paid within the year. Which pretty much means bills, money you owe to your vendors and suppliers, employee payroll, and short-term loans.
b. Long-term liabilities. This is pretty self explanatory, but long term liability is any debt that extends beyond one year, such as a mortgage.
3. Owners' Equity by definition is any debt owed to the business owners. So, this means that if you are the owner, and you invested $40,000 of your savings to start a business, that amount is recorded on the balance sheet as owners' equity. Another part of owners' equity is that of stock if you are dealing with publicly traded companies. Outstanding preferred and common stock represents owners' equity but is generally called shareholders' equity.

Knowing what your assets, liabilities, and owners' equity are will help you keep your business in the black.

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