Meanings of Assets and Liabilities
Fixed assets, which also include current assets and prepaid expenses, are the most important assets. In the case of a balance sheet , the assets are the page on which the use of funds is shown.
Note: The value of all assets must always correspond to the value of all liabilities. This sum is called the balance sheet total.
The most important items of the assets are shown in HGB § 266 II:
- Fixed assets: e.g. B. Buildings, machines and operating and office equipment – but also intangible things such as software and licenses as well as financial assets
- Current assets: cash on hand (cash or on the account), raw materials, other stocks – but also accounts receivable from customers
- Prepaid expenses: Payments for which consideration is received later, such as advance rent payments.
It should be noted at this point that it is necessary to activate additional items in the balance sheet in certain cases. But for a first explanation it is enough to remember that the current assets and the fixed assets represent the basic components of the assets!
What is a liability?
According to FOODANDDRINKJOURNAL.COM, the liabilities, which are equity and debt , are listed on the right-hand side of the balance sheet. The source of the funds is shown on the passive side (liabilities). The value of all assets is called the balance sheet total and always corresponds to the value of all assets!
Section 266 II of the German Commercial Code (HGB) lists all important items in the liabilities, which basically consist of equity and borrowed capital.
- Equity: This is the capital that belongs to the entrepreneur. This usually consists of two parts: The capital that has been paid into the company by the owner (equity). The legislature also fundamentally differentiates between subscribed capital and capital reserves – although in the end they are very similar. However, the retained earnings are to be distinguished, because these were generated and not paid out to the entrepreneur.
- Provisions: These are liabilities that the company has, for example towards the tax office, but the amount or the date of payment are not yet known. In addition, liabilities that are not yet secure, such as a fine in court proceedings, are also referred to as provisions.
- Liabilities: Colloquially, these are debts, such as loans from banks or unpaid bills.
Note: In very specific special cases, other items can also be booked in the liabilities. But in principle, provisions, liabilities and equity are the basic components of the liabilities side (liabilities).
Assets and liabilities on a balance sheet
The balance sheet , which is part of the annual financial statements of every businessman, is a comparison of assets and liabilities according to Section 242 (1) of the German Commercial Code (HGB), which must always be created in the form of an account on the balance sheet date .
The assets, i.e. the assets, are listed on the left-hand side of the balance sheet and the liabilities, i.e. the liabilities, provisions and equity on the right-hand side. If a balance sheet is drawn up, the so-called balance sheet equation applies to it: This means that the final total (balance sheet total) of assets and liabilities must always be the same.
Note: The term balance sheet is often used as a synonym for the annual financial statements, which in addition to the balance sheet at least also include the profit and loss account. If the term balance sheet analysis, balance sheet review or balance sheet falsification is used, then the annual financial statement audit, the annual financial statement analysis etc. is usually meant.
The bottom line is that the balance sheet total is formed for assets and liabilities and this represents one of the size criteria i. S. d. 267 HGB. The aim of the balance sheet is to obtain an overview of the net assets and the debt coverage potential by comparing assets and liabilities at a certain point in time, ie the balance sheet date.
The balance equation
A balanced balance sheet equation applies to all balance sheets and that means that the assets (assets) and the capital (liabilities) in the final total must always be the same! Equity is the difference between assets and liabilities as a pure accounting item. The term balance sheet is also used synonymously for the annual financial statements, which, in addition to the balance sheet, also require a profit and loss account. The two together then result in the annual financial statements, possibly also expanded with a management report or an appendix.