Are liabilities assets and why?

Discussion in 'Accounts & Finance' started by Matthew J, Aug 1, 2020 at 11:26 AM.

  1. Matthew J

    Matthew J UKBF Contributor Free Member

    59 5
    Hi guys

    the accounting equation states assets = liabilities + equity. My mind is really simple at times so please tell me if this is right:

    Assets = everything owned
    Liabilities = everything owed
    Equity = Another one way to say assets? Or does it mean owners “money in the pot” ready to invest in the business, or even profit made after subtracting liabilities (ouch my head is now spinning)

    I keep reading equity means interests but I have no idea what interests means?
    i’m trying to apply all the meanings of that word to make it make sense but I’m just not getting it.

    also liabilities = everything owed, but are liabilities things that are also owned? That’s the only way I can make sense of it.

    any help guys would be great but if anyone can make this is as simple as possible, meaning cbbc style that would be awesome lol
     
    Posted: Aug 1, 2020 at 11:26 AM By: Matthew J Member since: Oct 16, 2019
    #1
  2. Scalloway

    Scalloway UKBF Legend Free Member

    16,240 3,436
    Assets = everything owned
    Liabilities = everything owed to external sources
    Equity = Owed to the owner(s)
     
    Posted: Aug 1, 2020 at 12:28 PM By: Scalloway Member since: Jun 6, 2010
    #2
  3. John Hemming

    John Hemming UKBF Regular Full Member

    296 40
    The principles are the same whether a sole trader or Limited Company. The idea is that the company is worth what is left once all the assets have been sold and the liabilities have been paid off. Actually when businesses are sold there is often a value for the business that is quite different to the net asset value. Also if you had a fire sale of business assets you probably would not get as much as the original purchase cost minus depreciation.
     
    Posted: Aug 1, 2020 at 2:07 PM By: John Hemming Member since: May 23, 2019
    #3
  4. Matthew J

    Matthew J UKBF Contributor Free Member

    59 5
    thanks,
    so does that mean equity is just accounts receivable?
    If not then what does “owed to the owner” inclusive of, as now I write this accounts receivable is money owed to the business no?
     
    Last edited: Aug 1, 2020 at 2:31 PM
    Posted: Aug 1, 2020 at 2:25 PM By: Matthew J Member since: Oct 16, 2019
    #4
  5. Matthew J

    Matthew J UKBF Contributor Free Member

    59 5
    thanks, so are you saying equity means what the business is worth? Although interesting, I can’t see the relevance to my question, please excuse as I’m very amateur
     
    Posted: Aug 1, 2020 at 2:28 PM By: Matthew J Member since: Oct 16, 2019
    #5
  6. John Hemming

    John Hemming UKBF Regular Full Member

    296 40
    The problem is that there are a number of ways of working out what the business is worth. When you do a balance sheet you are making assumptions for example that if someone owes you £1000 that they will pay you £1000 or that if you bought something worth £5000 and have recorded depreciation against if of £3000 that you could sell it for £2000. Hence if you shut down the business and all of these sums are paid for your assets then that is what you get. However, if you sell the business as a "going concern" making masses of profits then you could get money based upon the probable future profits (theoretically a discounted cash flow).

    From a basic accountancy basis, however, the equity is what in theory (but rarely in practice) you get if you shut down and sell everything.
     
    Posted: Aug 1, 2020 at 4:13 PM By: John Hemming Member since: May 23, 2019
    #6
  7. Scalloway

    Scalloway UKBF Legend Free Member

    16,240 3,436
    No.

    In a simple set of accounts you will have fixed assets(buildings, machinery and vehicles), and current assets (stock, accounts receivable, bank accounts and cash)

    You will have current liabilities (accounts payable, bank overdraft)

    These all added up gives Net Assets.

    The business may be financed by long term loans.

    The owner's equity is Net Assets less long term liabilities.

    So you might have a Balance Sheet like this using made up figures

    Fixed Assets....................................£10,000
    Stock.........£1,000
    Debtors....£1,000
    Bank..........£1,000
    Current Assets........£3,000
    Creditors...................(£1,500)
    Net Current Assets..........................£1,500
    Net Assets..........................................£11,500

    Financed by
    Long term loan.............................£5,000
    Owner's equity................................£6,500
    TOTAL................................................£11,500
     
    Posted: Aug 1, 2020 at 4:59 PM By: Scalloway Member since: Jun 6, 2010
    #7
  8. Matthew J

    Matthew J UKBF Contributor Free Member

    59 5

    Thanks so much, really appreciate your time and effort with helping me

    so current liabilities are included as net assets...
    quite confusing for me as why would wages owed to staff be seen as an asset...
    but is it because at the time of classification, even though owed, they are part of the business..? sorry if this sounds like gobbledee gook

    this is a lot more clear now, thanks, however there are some basic concepts such as my query above that I have to get my head round.
     
    Posted: Aug 1, 2020 at 10:23 PM By: Matthew J Member since: Oct 16, 2019
    #8
  9. Scalloway

    Scalloway UKBF Legend Free Member

    16,240 3,436
    No. Current liabilities are deducted from current assets which gives net current assets.
     
    Posted: Aug 1, 2020 at 11:00 PM By: Scalloway Member since: Jun 6, 2010
    #9
  10. NicoJ

    NicoJ UKBF Regular Free Member

    252 48
    With all due respect to the other posters I think theyve overcomplicated this.

    The answer to your query is basic double entry. Every transaction must have an equal and opposite transaction. So, if you buy an asset (dr) there must be a corresponding liability (cr).

    The balance sheet is a snapshot at the given date of what the company owns and owes. Equity is the profit/loss made by the company (in simple terms).
     
    Posted: Aug 2, 2020 at 6:31 AM By: NicoJ Member since: Mar 27, 2017
    #10
  11. Jaydee

    Jaydee UKBF Enthusiast Free Member

    1,070 278
    Perhaps the simplest way of looking at this is after a couple of dummy transactions.

    If you buy something for £300 (but have not yet paid for it), and then sold it for £500 (and received the money) then you have made £200 profit and your balance sheet will look like this:

    Assets = £500 (being the money in your bank)
    Liabilities = £300 (being your unpaid supplier)
    Equity = £200 (being your profit - now "owed to the owner")

    And so the accounting equation works, and is 500 = 300 + 200
     
    Posted: Aug 2, 2020 at 10:52 AM By: Jaydee Member since: May 27, 2007
    #11
  12. Matthew J

    Matthew J UKBF Contributor Free Member

    59 5
    Thanks for everyone’s help, I think I may have finally got it on a basic level

    I think it was the way I was looking at it:
    I was looking at assets as made up of, rather than, equal to, in the equation - is that about right?

    I can see from posters explanation me that it gets a bit deeper than this but I’m hoping what I’ve just written is correct, otherwise I’m gonna pull my hair out lol

    Once again thank you so much for your time
     
    Posted: Aug 2, 2020 at 8:36 PM By: Matthew J Member since: Oct 16, 2019
    #12
  13. Financial-Modeller

    Financial-Modeller UKBF Enthusiast Full Member

    745 256
    Assets = everything owned
    Liabilities = everything owed
    Net Asset Value = Assets less Liabilities
    Equity = Net Asset Value

    To expand slightly on what @NicoJ said, if your business borrows £1 from the bank, the business receives £1 in cash, which is an asset. It also owes the bank £1, which is a liability. So the answer to your original question is that the same £1 appears as both an asset and a liability in the accounts.

    If the business spends the £1 on stock, and sells the stock for £3, the balance sheet would show Assets £3
    Liabilities £1
    Net Assets £2, which in this example is Shareholder's Equity and is the value of the company in the accounts.
     
    Posted: Aug 2, 2020 at 10:03 PM By: Financial-Modeller Member since: Jul 3, 2012
    #13
  14. Matthew J

    Matthew J UKBF Contributor Free Member

    59 5
    Thanks again

    I got it now.
    assets equal the sum of liabilities plus equity
    I was reading it as assets are made up of liabilities and equity

    in my head there is a difference haha
     
    Posted: Aug 3, 2020 at 2:47 PM By: Matthew J Member since: Oct 16, 2019
    #14