The main difference between assets and liabilities is that assets provide a future economic benefit, while liabilities present a future obligation. An indicator of a successful business is one that has a high proportion of assets to liabilities.
Assets are resources with economic value that an individual, corporation, or country owns or controls with the expectation that they will provide a future benefit. It is a balance sheet item representing what a firm owns.
Assets are bought to increase the value of a firm or benefit the firm’s operations. You can think of an asset as something that can generate cash flow, regardless of whether it’s a company’s manufacturing equipment or an individual’s rental apartment.
Liabilities are the company’s legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services.
There are several other issues relating to the difference between assets and liabilities, which are:
- One must also examine the ability of a business to convert an asset into cash within a short period of time. Even if there are far more assets than liabilities, a business cannot pay its liabilities in a timely manner if the assets cannot be converted into cash.
- The aggregate difference between assets and liabilities is equity, which is the net residual ownership of owners in a business.
For an individual, the primary asset may be his or her house. Offsetting this is a mortgage, which is a liability. The difference between the house asset and the mortgage is the equity of the owner in the house.
