Financial Statements ; What are Assets and Liabilities

A Financial Literacy Article by Dominic Shum, DRC Services

Most of us have assets, some have less and some have more. Our assets includes everything that we own including the air around us, the chair we are sitting on and our mental or physical capabilities. However, do you know that when you see listings of assets in financial statement, you might be surprised as to what qualifies as an asset as envisaged by accountants and regulators alike. In financial statements’ human resources are not considered assets although it is something useful; most CEO i know places Human Resources as their No.1 assets. But their accountants will beg to differ.

In the world of financial and accounting information, a resource needs to fulfill 4 conditions before it can be rightly called an asset of the corporation (or any reporting entity) that reports it. Diagram A below sums it up.

assets

DIAGRAM A- CHARACTERISTICS OF ASSETS – AN ACCOUNTANT’S VIEW

So lets say my company buys a printer for use in my office. I typically pay with cash of RM300 (Measurable cost) as its not too expensive (result of past event). I will then use it for my work and maybe for the next 3 years as well (future benefits)…. Also since I paid for it and obtain an invoice which says that its fully paid, I now own the printer (controlled). There!! The printer meets all the condition and it is officially my company’s asset.

diagram-b-liabilities-copy

DIAGRAM B- LIABILITIES

On the other hand liabilities are claims from external parties for payment in respect of transactions entered by the company which has resulted in economic benefit to the company. See Diagram B above for the type of liabilities usually found in financial statements. DS

Dominic Shum is a trainer, consultant & writer. He is a qualified accountant and has been working in financial management field for more than 26 years. for more information about him, visit his profile @ https://about.me/dominicshum
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