How does an asset side differ from a liability side in the balance sheet?
December 3, 2022 | 50,00 EUR | answered by Xenia Zellerbach
Dear Mr. Tax Advisor,
My name is Katrin Fritsche and I am a self-employed entrepreneur. I am having difficulties understanding the differences between an asset and a liability side in my accounting. I have read several books and taken online courses, but I cannot find a clear explanation that helps me distinguish and correctly apply these concepts.
Currently, I regularly prepare my balance sheet and understand the individual items on the asset and liability side. However, I find it difficult to identify which assets and liabilities should be placed on which side of the balance sheet. I am concerned that I may be making errors in my accounting and that this could lead my company into financial difficulties.
Therefore, my question to you as an expert is: Can you please explain in detail how an asset side differs from a liability side in the balance sheet? Which assets belong on the asset side and which liabilities on the liability side? Are there specific rules or guidelines that I should follow to correctly prepare my balance sheet?
I would be very grateful if you could help me better understand these fundamental concepts of accounting with your expertise and experience. Thank you in advance for your support.
Sincerely,
Katrin Fritsche
Dear Mrs. Fritsche,
Thank you for your inquiry and your trust in my expertise as a tax advisor. It is understandable that distinguishing between the assets and liabilities in accounting can be a challenge. I would like to help you better understand these concepts in order to correctly prepare your balance sheet.
In general, the assets side of a balance sheet contains all the assets of a company, while the liabilities side includes all debts and equity positions. The assets side shows what the company works with or what resources it has, while the liabilities side shows how these resources were financed.
On the assets side, all assets such as cash, receivables, inventories, machinery, real estate, or patents are listed. These assets are arranged by liquidity and maturities, with cash usually at the top. Depending on the type of asset, it can be classified as short-term (up to one year) or long-term assets (over one year).
On the liabilities side, you will find the debts and equity of the company. This includes liabilities to suppliers, financial institutions, or tax debts. Equity consists of share capital, reserves, and the annual surplus or deficit.
There are certain rules and guidelines to be followed when preparing a balance sheet. For example, assets and liabilities must be equal, as the balance sheet is prepared based on the principle of the balance equation: Assets = Liabilities. Additionally, the positions on the assets and liabilities sides must be compared and logically structured to provide a good overview of the company's financial situation.
I hope this explanation helps you better understand the differences between the assets and liabilities sides and carry out your accounting correctly. If you have any further questions or need additional assistance, please feel free to contact me.
Best regards,
Xenia Zellerbach
