RELATIONSHIP

BETWEEN LIABILITIES AND ASSETS 

Assets are the things a company owns—or things owed to the company—and they include tangible items such as buildings, machinery, and equipment as well as intangible items such as accounts receivable, interest owed, patents or intellectual property.  

 

If a business subtracts its liabilities from its assets, the difference is its owner's or stockholders' equity:  

  • Assets−Liabilities=Owner’s Equity 

 

This is also commonly presented as: 

  • Assets=Liabilities+Equity

THE DIFFERENCE BETWEEN

AN EXPENSE AND

A LIABILITY

An expense is the cost of operations that a company incurs to generate revenue. Unlike assets and liabilities, expenses are related to revenue, and both are listed on a company's income statement. In short, expenses are used to calculate net income. The equation to calculate net income is revenues minus expenses.

Expenses and liabilities should not be confused with each other. One is listed on a company's balance sheet, and the other is listed on the company's income statement. Expenses are the costs of a company's operation, while liabilities are the obligations and debts a company owes. Expenses can be paid immediately with cash, or the payment could be delayed which would create a liability.

Examples of Common Current Liabilities

  • Wages Payable: The total amount of accrued income employees have earned but not yet received. Since most companies pay their employees every two weeks, this liability changes often.

  • Interest Payable: Companies, just like individuals, often use credit to purchase goods and services to finance over short time periods. This represents the interest on those short-term credit purchases to be paid.

  • Dividends Payable: For companies that have issued stock to investors and pay a dividend, this represents the amount owed to shareholders after the dividend was declared. This period is around two weeks, so this liability usually pops up four times per year, until the dividend is paid.

BUSINESS LIABILITIES

Liabilities are settled over time through the transfer of economic benefits including money, goods, or services.

Recorded on the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.  In general, a liability is an obligation between one party and another not yet completed or paid for. Liabilities are also known as current or non-current depending on the context.

 

They can include a future service owed to others; short- or long-term borrowing from banks, individuals, or other entities; or a previous transaction that has created an unsettled obligation. The most common liabilities are usually the largest like accounts payable and bonds payable. Most companies will have these two line items on their balance sheet, as they are part of ongoing current and long-term operations.

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