Assets and liabilities are two of those accounting terms that sound more complicated than they need to be.

However, understanding them gives us a much clearer picture of what a business owns or controls, what it owes and the resources available to help it generate value.

That matters whether you are an owner, partner or part of a management team making decisions.

So in this episode, we strip away the jargon and use a restaurant to explain the difference between assets and liabilities, the main categories they fall into and why knowing the distinction is useful.

About this episode

Business jargon is difficult to avoid.

Assets and liabilities are two particularly important pieces of that jargon because they help us understand the financial position of a business.

In this episode, we look at:

• what makes something an asset
• what a liability means in accounting
• fixed assets and current assets
• debtors and accounts receivable
• current and long-term liabilities
• tangible and intangible assets
• why the balance between assets and liabilities matters

Most importantly, we translate those terms into examples we can actually recognise inside a real business.

What is an asset in business?

For the practical explanation in this episode, an asset has three important characteristics.

First, it is a resource that the business owns or controls.

Second, we expect that resource to provide some form of benefit to the business.

Third, we need to be able to put a value against that resource.

Examples might include:

• cash in the bank
• equipment
• vehicles
• stock or ingredients
• money customers owe us
• property
• machinery

The exact assets will depend heavily on the type of business.

Using a restaurant to understand assets

Imagine a restaurant preparing to serve customers.

Before it can sell a meal, it needs resources.

For example, the kitchen might contain:

• ovens
• cookers
• microwaves
• other kitchen equipment

Those resources allow the restaurant to prepare food and provide the dining experience.

It will also need ingredients.

The ingredients are bought, transformed into meals and then sold to customers.

Both the kitchen equipment and the ingredients are assets, but they behave differently inside the business.

That is why accountants divide assets into categories.

Fixed assets explained

Fixed assets are resources we normally expect the business to keep and use over a longer period.

They help the business operate and generate value rather than being bought specifically to turn quickly into cash.

For our restaurant, that could include:

• ovens
• cookers
• kitchen equipment
• furniture
• property used by the business

A motor dealership might have a showroom, reception equipment and other fixtures.

A manufacturer may have substantial machinery and production equipment.

Meanwhile, transport and telecommunications businesses may depend on relatively large amounts of fixed assets.

The important idea is not that a fixed asset is literally fixed to the floor. It is that the business expects to retain and use it to support its activities.

Current assets explained

Current assets have a different role.

They are typically resources that move through the normal operating cycle of the business and may eventually turn into cash.

In the restaurant example, ingredients are current assets.

The restaurant buys them, turns them into meals and sells those meals to customers.

Cash itself is also a current asset.

Another common example is money owed by customers.

Suppose the restaurant provides outside catering to a commercial customer and allows them 30 days to pay.

The work has been done, but the cash has not arrived yet.

That amount owed by the customer is an asset.

“And what is it about accountants? If one word exists, we'd like to invent others.”

So you may hear that customer balance described as a debtor or accounts receivable.

Different wording, same underlying idea: somebody owes money to the business.

What is a liability?

Now let us look at the other side.

A liability represents money or an obligation the business owes to somebody else.

Common examples include:

• business loans
• bank overdrafts
• hire purchase agreements
• finance arrangements
• amounts owed to suppliers
• unpaid wages
• other unpaid business costs

Just as we divide assets into useful categories, liabilities are also grouped according to when they are expected to be paid.

Current liabilities explained

Current liabilities are amounts the business expects to settle in the shorter term, typically within the next 12 months.

For example, suppose a supplier gives you 30 or 60 days to pay for goods or services.

Until you pay the supplier, that amount is a current liability.

Other examples can include:

• supplier balances
• bank overdrafts
• unpaid wages
• short-term amounts due under borrowing arrangements
• other bills that need settling within the next year

These amounts matter because the business needs enough cash and resources available to meet them when they fall due.

Long-term liabilities explained

Long-term liabilities are amounts due beyond the shorter 12-month period.

That might include longer-term:

• loans
• mortgages
• hire purchase arrangements
• other finance agreements

However, one borrowing arrangement can contain both current and long-term amounts.

Take a mortgage as an example.

The mortgage itself might run for 25 years.

Amounts due in the coming 12 months belong to the shorter-term portion, while amounts repayable later belong to the long-term portion.

This helps us understand not only how much debt exists but when the business needs to pay it.

An asset and the debt used to buy it are not the same thing

This is an important distinction.

Suppose the business buys a property using a mortgage.

The property is an asset.

The mortgage is a liability.

They are connected because the borrowing helped finance the purchase, but they are not the same thing.

The same principle may apply when a business buys machinery, equipment or vehicles using finance.

Understanding the difference helps make financial statements much easier to interpret.

For a wider guide to reading those reports, see our explanation of understanding your financial statements.

Tangible and intangible assets

Assets are not always things we can physically pick up.

Some assets are tangible.

That means they have a physical form.

Examples include:

• vehicles
• computers
• machinery
• equipment
• property

Other assets can be intangible.

These do not have the same physical form but may still represent value to the business.

The episode gives examples such as:

• goodwill
• copyright
• trademarks
• patents
• intellectual property

So when we think about business assets, we should not only look around the office or workshop for physical objects.

Assets and liabilities at a glance

CategoryWhat it meansExamples from the episode

Fixed assets

Resources retained and used by the business

Ovens, kitchen equipment, property, machinery

Current assets

Resources that move through the operating cycle or can turn into cash

Ingredients, cash, debtors

Current liabilities

Amounts generally due within the next 12 months

Supplier balances, overdrafts, unpaid wages

Long-term liabilities

Amounts due beyond the shorter-term period

Longer-term loans and mortgage balances

Tangible assets

Assets with physical form

Vehicles, computers, machinery

Intangible assets

Non-physical assets

Goodwill, trademarks, patents, intellectual property

Why assets and liabilities matter

Understanding these categories helps us see the financial health and structure of the business more clearly.

Think of a seesaw.

On one side are the resources and value represented by your assets.

On the other side are the amounts you owe.

“Ideally, you always want more assets than you've got liabilities.”

The point is not that every business should avoid debt completely.

Instead, knowing what we own or control, what we owe and when those obligations fall due gives us a clearer financial picture.

It can help with:

• understanding financial position
• planning future spending
• managing debt
• monitoring cash requirements
• making better business decisions
• reading financial statements with more confidence

If accounting terminology often gets in the way, our guide to understanding financial terminology is a useful companion.

Look around your own business

A useful exercise is to identify the assets and liabilities you already have.

Start with assets.

What resources does the business control?

Which are fixed assets?

Which are current assets?

Then look at liabilities.

Who does the business owe money to?

What needs paying in the next 12 months?

What borrowing continues beyond that?

Doing this turns accounting vocabulary into something much more practical because you begin connecting the terminology with your own business.

FAQs

What are assets and liabilities?

Assets are resources owned or controlled by the business that can provide value or benefit. Liabilities are amounts or obligations the business owes to other parties.

What is the difference between fixed assets and current assets?

Fixed assets are generally retained and used by the business over a longer period. Current assets move through the normal business cycle and may turn into cash, such as stock, customer debts and cash itself.

Is money owed by customers an asset?

Yes. Where a customer owes the business money for work already completed or goods already supplied, that amount is normally treated as a current asset. You may also hear it called a debtor or accounts receivable.

What is a current liability?

A current liability is an amount the business expects to settle in the shorter term, generally within the next 12 months. Examples include supplier balances, overdrafts and other short-term amounts due.

Can a mortgage be both current and long-term?

Yes. The amounts due within the coming 12 months can form the current portion, while the remaining balance due later can sit within long-term liabilities.

Are all assets physical?

No. Tangible assets have physical form, such as machinery or vehicles. Intangible assets can include goodwill, trademarks, patents and other intellectual property.

Why should business owners understand assets and liabilities?

They help you understand what resources the business has, what it owes and the overall financial position. That information supports better planning and decision making.

Episode Timecodes

• 00:00 - Why assets and liabilities matter
• 01:22 - Three characteristics of an asset
• 02:05 - What liabilities mean
• 02:26 - Restaurant example
• 03:31 - Fixed assets explained
• 04:27 - Current assets and cash
• 04:54 - Debtors and accounts receivable
• 05:10 - Fixed and current asset categories
• 05:53 - How assets differ between industries
• 06:10 - Liabilities and business debt
• 06:48 - Long-term liabilities
• 07:36 - Current liabilities
• 08:19 - Splitting a mortgage between current and long-term debt
• 09:01 - Tangible assets
• 09:19 - Intangible assets
• 09:47 - Why the balance between assets and liabilities matters
• 10:27 - Identifying assets and liabilities in your own business

Related episodes and guides

• Understanding Your Financial Statements
• Understanding Financial Terminology
• Why Financial Accountability Matters in Business
• Understanding Cash Profits

Key takeaway

Assets and liabilities tell us two different parts of the financial story.

Assets represent resources the business owns or controls and uses to generate value.

Liabilities represent amounts the business owes.

From there, we can divide assets into fixed and current categories, separate physical and non-physical assets, and split liabilities according to when they need to be paid.

Once you understand those basic buckets, financial statements become much less intimidating.

So have a look around your own business.

What are your assets? What are your liabilities? And what does that tell you about the financial position you are in?

Further Support

If you need help understanding your accounts, organising your bookkeeping or getting clearer information from your numbers, you can contact us for an initial chat.

You can also explore our free online business calculators for practical financial support.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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Business jargon. There's just no getting away from it. Whether you are an owner or a partner management team making decisions, jargon is not something you can escape. And two particular words, two particular bits of jargon that I'm gonna go through today are assets and liabilities. I'm gonna go through what assets are,

what liabilities are, how we can recognize them and why they're so important and why they're so powerful in terms of understanding them for business.

You are listening to the I Hate Numbers podcast with Mahmood Reza. The I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. My name is Mahmood. I'm the founder, director of the accounting firm I Hate Numbers and also the financial storytelling platform Numbers Knowhow. My mission over the last 27 plus years, with the thousands of businesses that I've helped is to increase financial understanding to help win more battles than one loses between what goes on between our two earlobes.

Also to help businesses make more money, save time and tax, and have the businesses they aspire to. That's a pretty good objective if I do say so myself. Let's crack on with the video. So, the idea of assets are they satisfy and they've got three essential ingredients mixed in with them. Number one, they are fundamentally a resource that is owned or controlled by the business. Number two,

that we are likely to get benefits from having that particular resource. Number three, we can put number, we can actually measure what the value of those particular benefits are. That's the first three things that we need to take on board for assets. The liabilities is, I'm not a big fan of that particular term myself.

But essentially liabilities are debt - monies that are owed to our outside parties. So with our starting definition here, and we're gonna dive deeper as well, let's think about assets and let's think about liabilities and to help us, what I'm gonna do, we're gonna dive in deeper and we're gonna take the example of a restaurant.

Now with a restaurant, it needs to make sure before it can start selling food to its customers, before it can start generating profits, which is the name of the game. It needs an establishment, it needs a property of some description. So let's assume it's a restaurant that's got people coming in to dine. So what it needs, it needs cooking equipment.

It needs microwaves. It needs ovens. It needs a cooker. It needs the whole kitchen kitted out here. Now, those assets, those resources that it has are there for the purpose of actually making the food, preparing the food, and providing that wonderful dining experience. Now also, It's all very well having a beautifully designed kitchen, but you also need to make sure you've got food that you can prepare and sell on to your diners.

So the restaurateur will go out and buy ingredients and with those ingredients, and they will transform those into a meal, ready to be eaten by their diners. Now, those two that will lump of things that we've just described, those kitchen equipment, the food ingredients, here, they are called assets. That's a nice generic umbrella term

describing more of them. Now, more particularly if we wanna dive a little bit deeper here, those group of assets can be subdivided into two groups. That's what will we do with accountants? We always like to classify and we like to put things into buckets. Now, those two groups that we're gonna have, the ones that we tend to hang onto, the ones that are permanent within our business, that we tend to retain to help us generate the value to help generate the profits are called fixed assets. Now the idea of fixed assets is not that it actually bulges to the floor,

but they're actually there to be kept within our business here. So the cookers, the microwave, the ovens, or the kitchen equipment that we've got will be classified as fixed assets. Now, what we generate value from is the preparation of the food and providing that to our customer. So the raw ingredients or the ingredients that're going to our meal are called assets, by all means, but they're also called current assets.

And the whole idea of current assets is they transfer into cash eventually, so when we sell our meals to our customers, it will either pay us for cash. Always nice to hear that. Nice to see. Cash is an asset, but it's called a current asset. Now, it may be that we got some outside diners. We've got some commercial customers, and we may be selling food to them outside catering, but they all want credit terms and it might be they pay our bills after 30 days.

Now those customers who owe us money, even though we sold them the food, even though we've done the actual service preparation and delivered the food to them, are also called current assets, and specifically they're called debtors. And what is it about accountants? If one word exists, we'd like to invent others.

So if you hear the word debtors or accounts receivable, it's the same idea. So now we've got a bunch of assets, we've broken them down into two broad categories. We've got those fixed assets, and we've also got our current assets. If you think outside of that, different industries will have different things. So a motor dealership, for example, will have a showroom.

That showroom will be classified as a fixed asset that's there to display the cars, things it's got like the counter tops or the reception area. All the items in there, the lighting, et cetera, will also be part of the fixed assets of that business. All businesses largely will have fixed assets. Some will have more than others.

So typically in manufacturing, telecommunications, transportation, the level of fixed assets will be far greater. Most businesses will have current assets as well. So even if you've got money in the bank, money in the bank is a current asset. You're gonna have it in there, you're gonna dip into it and you're gonna use it.

So that's the assets that we've taken care of. Now, what about the liabilities? Now, liabilities are represented by debt. So where we owe monies to somebody else, those are classified generically as liabilities. Forget about common English, forget about what you mind say in conversation. We're entering the world

of accounting and finance here. So we have a slightly different take on the words that we're using. Now, when we look at liabilities, liabilities where it's money owed can make a whole bunch of them. It could be loans that you borrowed. It could be higher purchase agreements. It could be leases on vehicles and machinery that you've obtained.

It could also be bank overdrafts. It could be money that you owe to a supplier for goods and services that you procured. Now, within those liabilities, we also break those down into groups, and the two groups are long-term, and in the world of finance and accounting, long-term is classified as any debt that has to be paid back after more than 12 months.

So typically a mortgage could be classified as a long-term liability. Come back to the mortgage in a moment. Loans, HP agreements and the like, will all be classified as long-term liabilities. But just pause that for a moment here and think about the payments that we've gotta make in the next 12 months. Now, current liabilities, by the way, are short-term and in the world of finance and accounting a short-term debt,

a short-term liability is anything that has to be paid within 12 months of the end of your period of time. So typically when you buy goods from a supplier, the supplier may give you 30 days, 60 days, whatever those credit terms are, that represents a current liability. If you don't pay them back within that 12 months, then there's gonna be some very interesting conversations taking place between you and your supplier.

And in a worst case scenario, they're gonna get very upset and they're either gonna stop supplying you or take you to court or both of them. Bank overdrafts would also be classified as current liabilities, monies that you owe to your staff for unpaid wages, monies that you owe to any supplier. For example, accounting services that haven't been paid.

Those are also classified as current liabilities. Now, let's go back to these ideas of mortgage and the loan. Now, if you take out a mortgage on a property, weirdly, the mortgage itself is, could be a 25 year mortgage, and typically the mortgage company will want something paid back from you within the next 12 months.

So the next 12 months worth of repayments are current. The remaining 24 years of that mortgage term becomes a long-term liability. If you think about the property that we mentioned earlier on, the property, the fiscal thing itself is an asset, more specifically, a fixed asset. We've obtained that by way of the mortgage and we've got, therefore, a long term and a current liability as a result.

Now, within the context of assets, by the way, assets aren't always physical. You can't always see them. You can't pick them up, you can't touch them and you can't see them. For those that you can physically see, touch, feel, those are called tangible assets and we've got things like vehicles, PC equipment, machinery, plant.

Those are all generically described as fixed assets. Now, intangible assets are things like goodwill on a business that you buy, could be copyrights, trademarks, patents, intellectual property. Those are all examples of intangible fixed assets. So folks, why does it matter? Well, the name of the game is if we imagine a seasaw and you've got assets on one side, you've got liabilities on the other hand,

ideally, you always want more assets than you've got liabilities. Imagine yourself as a, an individual householder. If you look around you and you add up the value of your house, all your furnishings, your fittings, money in the bank account, top them all up. Hopefully you've got more items of value, i e your assets.

Then you have got debt i.e. money owed to people, credit card, overdrafts, loans, and the like. Now, in the context of a business, the more profit that you make, the value of the assets go up, good news, the less your liabilities are. So the more you can pay down debt, then the bigger the value of your business will be on paper, which is what we all want if we're in business.

Remember the name of the game in our business is making profits, generating value as much to reward ourselves, but also so we can continue to deliver our why and we can thrive, let alone survive. So folks, I hope you found this useful. So to think about the idea of assets and liabilities, have a root around your own business and identify what do you have in your business that is

an asset. What you have in your business that represents a liability I'd love to hear your feedback, folks. Until then, happy counting. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.