Are accounts receivable an asset to a business?

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By Adella Fitzroy

Ask any accountant where accounts receivable are held in the financial realm and they will tell you that they are assets, something that benefits a company's financial health. Unfortunately, what some people would consider a benefit might end up being so. The trouble with accounts receivable is that they are a promise to pay for goods or services that have been sold to a customer. So what happens to accounts receivable that are not paid by the customer?

In many cases, accounts receivable can be beneficial to the company who carries them. They are, after all, a promise to pay for goods and services received. In some cases, however, that's as far as they go. Financial failure, malicious intent, and other factors result in debtors to a company failing to make good on their accounts. On the positive side, a company that carries a reasonable amount in accounts receivable can value itself higher using these accounts as an asset on their books.

The usual course of action, after collection efforts fail, is to write a bad account receivable off as a bad debt. Other times, another company might buy a company's accounts receivable as a benefit to them, in which case the selling company is relieved of the burden of the money that is owed.

Some creditor companies turn accounts receivable over to a collection agency or similar company in order to collect payment. Sometimes this is successful, but short of success this course of action often results in more debts that is incurred by the company holding the accounts receivable. Still other firms choose to take their debtors to court, which again can result in a settlement of the amount owed, but can also result in more costs, or even the bankruptcy filing of the debtor, in which case the money is often never recovered.

Another problem that presents itself when a debtor fails to make good on their account is that the company that is carrying the account receivable continues to spend time and money on maintaining the account despite not receiving the benefit of the money that is owed.

Perhaps one of the biggest problems with the failure to collect on an account receiving is that even though work was performed or goods were delivered, and money was not received to compensate for the time and materials rendered, that time and those materials used in the engagement of the goods sold were still paid for by the creditor company, which again fails to receive benefit and goes into arrears for the product and/or labor involved.

The solution used by many companies is to not offer credit. For this reason certain sales might not be made, and either client companies will either wait until they can purchase with cash or they might even go to a company that will accept their credit. The chance of this happening is up to the potential creditor. Only time and a history of results will determine the best policy for the credit company in the long run.

About the author: Adella Fitzroy is a small-business owner who received funding and financial advice from EBF Group Ltd. She found that the advice she accumulated and received from the company was important in helping her review the progress and profit of her company.

Tips on how to choose accounting software for your small business

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Years ago, keeping books was a tedious and difficult job which involved tons of papers, pens and pencils, ledgers, and commonly the carpal tunnel syndrome, because accountants and small business owners used pen and paper to record all the financial transactions a business was making. Today, however, things are significantly different. We live in a world where everything moves very quickly, and every minute is important. With the advancement of technology, we have been able to computerize almost every task we have, and this includes bookkeeping.

Why is accounting software so important to utilize?

Well, we will start from the obvious reasons – saving time, saving money, and eliminating the human error factor from the equation of bookkeeping. Aside from the obvious reasons, there are many more reasons related to the performance and success of your business. For example, you can see different trends in your business practice, such as financial reports from the past quarter, your stocks, predictions for the next quarter, and so on.

What should you look for when choosing business accounting software?

Here is a list of things to look for when deciding which accounting software to go for:

• Price – The first thing to think about is the price. There are some open-source accounting programs available, but it is always better to go for a paid software application. Find one that has a reasonable price and go for it.
• Ease of use – It is very important that the accounting software you go for is easy and intuitive to use, especially if you have to do your own bookkeeping. There are accounting programs that are very complicated, and there are those that are pretty easy to use. Try a few out and see which suits you most.
• Features – The features offered by the accounting software you choose will make all the difference in your daily schedule. Namely, not all the programs will offer you the same options and tools, and you should choose the one that has everything you need in order to run your business smoothly and without any hiccups.
• Ask your staff – If you have accounting staff, you should consult them regarding which accounting software to choose. They might have previous experience with this, and you should also take into account their opinion if they are the ones who will be using this software the most.

QuickBooks 2013 is a very good choice

While you are doing your research you will surely come across accounting software called QuickBooks, and there is a very good reason for this. QuickBooks 2013 is probably the best choice you can make when trying to find the perfect accounting software for your company. This program has all the features you can only wish, and QuickBooks Pro 2013 training will help you master all of them. It is important to know that QuickBooks Pro 2013 is very easy to use and intuitive as well, so mastering all the tools within the program should not be very difficult and shouldn’t take you a lot of time.

About the author: Jack offers Quickbooks pro 2013 training, both for corporates and individual clients. He has been in this field for last 5 years and regularly travels around the world on training assignments.

Guest Post: Paper or Plastic? The Pros and Cons of Business Credit Cards

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With constant talk of mounting government debt, student loan debt soaring to higher rates than ever before, and fear of an overall failing economy, credit cards are not necessarily the most desirable thing to boost financial security right now. However, there are a number of advantages business credit cards can offer small business owners in today's economy. Of course, there are several facets to of credit building that business owners and professionals need to consider before switching to plastic. As with all business decisions, professionals should examine all aspects of using credit to facilitate their business needs before opening a business credit card.

Business credit cards can be a useful tool for small business at any stage of their development. As any business owner knows, financial flexibility can be one of the most important things when it comes to running a business successfully. There are times that spending exceeds earning and your budget as a business can vary greatly from one month to another. Business credit cards are a convenient way to quickly access financing for short-term needs, while also increasing your company's spending ability. But, of course, credit use as a small company must be very carefully managed. To decide if a small business credit card might be the right option for you and your business explore these pros and cons.

The Pros

There are many reasons business credit cards may be a great option for small business owners:

1. Convenience: Credit cards offer the business owner immediate access to funds and financing for purchases or cash withdrawal. With the business world being particularly unpredictable, this immediacy and ease can be extremely important. While making hasty decisions concerning spending is not advised, sometimes business owners need to act on their feet and be prepared.

2. Online access: As our world becomes more and more mobile, online accessibility has become ever more essential. Many businesses use online vendors and suppliers to meet their business needs. These online purchases can be made more easily using a business credit card.

3. Bookkeeping assistance: One advantage to using credit that many small business owners rarely consider is the bookkeeping guidance cards can provide. Cardholders not only receive monthly statements detailing their purchases, but many cards provide online tools to help manage accounts and keep track of spending. These tools can be extremely useful with maneuvering taxes, audits, and employee spending.

4. Incentives and rewards: One of the biggest perks that business credit cards can offer are incentives and rewards to their users. Business owners choose cards that provide cash back rewards, airline discounts, accommodation discounts, no fee offers, and much more. These incentives can make a huge different for small businesses that do a lot of spending in order to properly operate and thrive. When choosing a business credit card, consider what type of reward program might be most useful for you and your business. If you do a lot of business travel, consider an airline reward business credit card. These programs can help you save a lot of money in the long run, if you choose them wisely.

The Cons

As with anything, there are two sides to opening a business credit card. Before rushing out and opening the first line of business credit you find, consider these potential downsides:

1. Security issues:

Owning a business credit card (or any credit card) boils down to use it carefully. Business owners should carefully monitor their accounts and regularly check on the security of their finances. Credit cards open individuals and businesses up to some security threats that are worrisome. If cards or card information is compromised, malicious individuals can wreak havoc on your business and finances. With careful monitoring and diligent security measures in place, credit card safety can be found.

2. Finicky interest rates: Interest rates are likely the biggest worry involved with credit card use. Unlike a loan or fixed line of credit, a credit card company can change the interest rate on your card. This fluctuation may be in your favor or not.

3. Sometimes pricey: Because business credit cards offer so much ease and convenience to their users, they can be more expensive than other credit cards. While this is not always the case, many business credit card issuers will charge a higher interest rate than a bank or fixed line of credit. That higher interest rate can become a problem if business owners do not pay back their credit on time or in full each statement.

Eliza Morgan is a full time freelance writer and blogger. She specializes in writing about business credit cardsand other business related topics. If you have any questions email her at elizamorgan856@gmail.com.

Business Owner's Guide to C Corporation Tax Rates

C corporations, which are the largest of U.S. businesses, can be taxed in several different ways. Specifically, different tax rates are applied to capital gains on the sale of shares of C corporations and dividends. Additionally, federal and state taxes may be charged on earnings held by the corporation. These tax rates are not standard across the board in regard to state tax and there are ways C corporations can minimize and lower tax rates.

Federal taxation of C corporations

The taxation of income generated by C corporations is taxed on a sliding scale at the federal level. The tax rates according to the United States Internal Revenue Service are as described below. Generally, the tax rate rises with income but at certain saturation points the tax rate is highest and then drops a few percentage points before rising and then dropping again.

The lowest tax rate being 0% or negative amounts and the highest tax rate being 38% for profit between $15,000,000-$18,333,333. The tax rates adjust to 15% for income between $0-$50,000.00 then move up to 25% for taxable income between $50,000-75,000 and up again to 34% for taxable income between $75, 000-$100,000, and then up to 39% for profit between $100,000 and $335,000. An interesting drop occurs in the tax rate for incomes above $335,000-$15,000,000 at which the rate is either 34% if below 10 million and 35% if below fifteen million. Taxable income over $18,333,333 drops back to 35%

If a C-corporation operates offshore on the Island of Puerto Rico and U.S. territory, the maximum corporate tax is currently 7% and lower for corporations in certain industries subject to tax exemption. Additionally, there are several favorable tax credits and deductions that can be compute a lower adjusted gross income and taxable income. Deductions can includes up to 200% or double deduction for training expenses, and research and development. Additionally corporate activities that make use of local goods, workers and re institute struggling businesses may also receive credit to further lower taxable income and total taxation.

State taxation of C Corporations

Unlike Federal taxation, state taxation can be avoided altogether depending on the State of operation. States such as Delaware and Nevada have favorable state tax rates but annual franchise fees in the State of Delaware may offset the tax savings. State corporate tax rates range from 0%-10%, and thus have significant influence on a companies total income potential. Some of the more expensive states to operate a C Corporation in, in terms of State taxation are Massachusetts 9.5%, Minnesota 9.8% and Pennsylvania 9.9% and some of the lower taxed States include Kansas 4%, Colorado 4.5% and Utah 5%.

Investor tax rates on capital gains from C corporations

Owners of C Corporations are only subject to capital gains tax if the shares of the company are sold within the fiscal tax year ending December 31 of any given year. Many advocates of lower corporate taxation proclaim the capital gains tax to be a double taxation because as owners of the company, the shareholders have already been subject to one tax through the corporate income tax. Nevertheless, capital gains tax continues to exist and comes in two types, short term and long term capital gains tax.

Short term capital gains tax is higher and applies to profit on the sale of businesses owned for less than one year. The short term capital gains tax is the same as one's normal income tax rate. For example, if an individual has a taxable income of $31,000, is filing single and the tax rate is 15% , then that individual will be taxed 15% on short term capital gains. This rate rises with income making short term capital gains on par with long term capital gains only while incomes remain in the 15% bracket. That is to say, long term capital gains tax rates are fixed at 15% whereas short term are variable and can range from 10-35% depending on income levels.

Tax rate on C Corporation dividends

Federal taxation of dividends is currently set at a maximum of 15% and a minimum of 5% for individuals at or below the 15% income tax bracket. This tax rate is a result of Jobs and Growth Tax Relief Reconciliation Act of 2003. For this reasons, dividends with fixed payouts may be advantageous to certain corporate officers and investors instead of stock options because the difference in taxation could cost more than the extra yield between the two investments and those yields influence on overall income.

Strategies for C Corporations to lower tax rates

There are several methods by which C Corporations can lower taxation. These strategies may include geographical location, restricted and/or heavy insider ownership of the corporation, roll over of negative earnings from previous years, and legal manipulation of earnings so as to place the corporations taxable income in a lower tax bracket. For example, if a C corporation's taxable income is near the border of the 25% and 34% tax rates, that company may make a charitable contribution just large enough to lower taxable income to the 25% bracket thereby saving 9% in taxes. That 9% savings can far outweigh the cost of the charitable contribution in some cases.

Taxation of C Corporations is subject to various tax rates and regulations depending on what kind if income is being taxed, i.e. C Corporation earnings, capital gains from the sale of C corporations, dividend income etc. Additionally, tax rates vary based on geographical location and state of incorporation and operation. Financially strategic use of deductions and tax credits can also have significant bearing on the total taxable income a C Corporation incurs for a given tax year.

Sources:

1. http://www.nysscpa.org/cpajournal/2004/1004/essentials/p40.htm
2. http://www.irs.gov
3. http://www.pridco.gobierno.pr/english/tax_and_business_incentives/tax_incentives/3.12corp_tax_incentives.htl
4. http://www.taxadmin.org/fta/rate/corp_inc.html

Accounting terms: The General Ledger

In accounting, the general ledger is an important aspect of bookkeeping that verifies and documents where and how money is utilized within a business. General ledgers are important for assessing business cash flow, and in preparation of other financial documents that are distributed to corporate owners, managers and government regulatory authorities for financial disclosure and decision-making. General ledgers can be maintained using accounting software or via spreadsheets, and are ideally done so on a consistent basis. The following subtitled sections breakdown the general ledger into its component parts and principles.

• Credit and Debit accounts

Not all types of accounts in the general ledger work the same way. Some accounts are debit accounts and others are credit accounts. This means that value is subtracted from either the debit or credit side postings. If a general ledger T-Account is a debt account, it is increased by posting on the debit side and decreased on the credit side. The reverse is true for credit accounts. Debit accounts include assets and expenses whereas credit accounts include liabilities, owners equity and revenue. For an illustration of how posting in the general ledger is different for debit and credit accounts, consulting a guide to debit and credit on general ledger accounts can be helpful.

• General ledger accuracy

Posting numbers in the general ledger is important in accounting. There is essentially no room for error when posting numbers in a general ledger because accounting is either right or wrong when it comes to implementing Generally Accepted Accounting Principles (GAAP) and standard methods of recording financial activity. An inaccurate general ledger can lead to fault financial decision-making, bad financial reporting and poor financial records. If posting in the general ledger includes more than one account, the value of the credit posts must equal that of the debit. The accuracy of a general ledger may be discovered in a failure to reconcile or through an accounting audit.

•Posting in the general ledger

Several different people may post in a general ledger depending on the size and type of organization. Larger organizations may have a networked general ledger with which many people can record flow of money within and without a business at the same time. Efficiently and quickly posting in the general ledger helps in the resolution of questions regarding business finances and in the reconciliation of accounts. All debit and credit accounts should balance i.e. equal each other in value. This process is called reconciling the general ledger. An example of a general ledger posting is as follows: An asset is paid for in cash and credit; in the initial posting total debit will be split between the asset and expense accounts, and the total credit will be divided between cash and accounts payable.

• T-Accounts

Since the general ledger consists of multiple accounts, an accountant or bookkeeper can specifically allocate cash flows by documenting the movement of money on a T-Account. The T-Account consists of columns and rows used for recording date, and account type in addition to whether money is debited or credited on that account. T-accounts are named such because the debit or credit columns are formed on either side of the T, and the top of the T is the line where the account name is placed. Some general ledger accounts may also be assigned numbers in addition to names. For example, in the following linked to California State Administrative Manual, general ledger asset accounts are numbered between 1100-1999.

• General ledger software

There are many standardized, cost effective and useful types of accounting software that include general ledgers. If a company has specific intranet network needs, an accounting software may need to be customized to work most efficiently for that company network. Other times a software such as Intuit Quickbooks may be sufficient, cost effective and time efficient for recording and management of general ledger data. Cloud computing software may also enable outsourced Information Technology management and expanded options for use of general ledgers. For example, recording of general ledger information from mobile hardware and outsourced maintenance of accounting software.

Sources:

1. http://bit.ly/cJ26Ow (University of Houston-Victoria)
2. http://bit.ly/dvWCbc (California Department of General Services)
3. http://bit.ly/F0uNY (DWM Beancounter)
4. http://bit.ly/9mV94A (QuickMBA)
5. http://bit.ly/c1haCb (Watch Captain)

Comparing Expense and Capitalization In Accounting

Accounting principles allow the purchase of large business items to be recorded on assets without cost other than depreciation expense on the income statement. In other words, the immediate cost of expensive business expenditures can be incurred over time via straight line or accelerated depreciation. This process is called capitalization of expenses and should not be confused with "capitalization" which is equity investment within a company.

Expensing is different from capitalizing of expenses because items i.e. assets or services are not depreciated in this method. Instead, with this accounting technique, when items are expensed immediately the costs are realized as a reduction to revenue rather than an increase to the liabilities of a company. If the expense is to be paid over a few months, all or part of it may become a short-term liability but will usually quickly become expensed as the debt is paid.

How to expense and capitalize costs 

To expense an item assets are debited if it is a product or prepaid service and liabilities are credited if the expense will payable in the future. If the expense is payable immediately, revenue is debited and cash is credited since revenue expenses are credit accounts and assets are debit accounts.

To capitalize and expense, assets are debited i.e. usually a long term or fixed asset and liabilities are credited. Then, as expenses are realized through depreciation, liabilities are debited and revenue is credited as an expense. Thus, instead of immediately lowering revenue and therefore profit calculations, capitalized expenses increase assets and liabilities for a balanced increase in both.

Advantages of expensing 

The advantages of expensing are not the same as those of capitalizing, however since capitalizing of expenses is only realized for larger expenditures the benefits of capitalizing expenses cannot be realized when expensing and vice versa. Below are a few of the advantages that may be realized with the expensing method:

• Increases to liabilities are short lived if accrual and do not occur if paid immediately
• Taxable income may decline more than a capitalized expense depending on the exact amounts
• Interest payments, if any, will likely be short lived
• May not involve as much bookkeeping requirements as large capitalized expense

Advantages of capitalization 

Capitalizing expenses is a little more complicated than expensing but can have advantages that aren't realized with expensing. These advantages may have a greater impact on a company because the monetary amounts of capitalized expenses are larger. A few of the potential benefits of capitalized expenses are listed as follows:

• Does not have as a dramatic effect on the income and income statement as when fully expensed.
• May encourage equity investments
• Interest and/or value changes of debt over time may end up costing less
• Has potential tax benefits that can add additional value and/or savings to the expenditure

Since many businesses don't operate with zero debt, looking into different ways of expensing purchases may be wise to an overall business strategy. Two such methods of expensing are short term expensing and capitalization expensing. The former is usually used with more current and/or revolving expenses such as pre-paid services whereas the latter usually applies to larger, more long-term expenditures such as buildings, and expensive equipment or machinery. Each method has unique advantages, bookkeeping requirements, and effects on financial statements and income numbers.

Sources:

1. http://www.answers.com/topic/capitalize?cat=biz-fin
2. http://www.admin.mtu.edu/admin/procman/ch2/ch2p9.htm
3. http://www.dwmbeancounter.com/tutorial/MouseQuizzes/Test4-1.html

How An Accountant Can Help You Fund Your Business

Accountants can help fund a business through their fiscal organization skills and knowledge of accounting systems, methods and techniques. Since much of their profession revolves around financial reports, analysis and comprehension of financial data, there is a good chance they will be adept at maximizing the use money, knowledgeable about where to find money, and skilled in avoiding excessive and/or unnecessary expenses related to taxation, costs and budgeting. Some of the methods an accountant may utilize are clarified as follows:

Fiscal resources

Accountants may be skilled is the issuing and funding of low cost debt financing such as debentures and indentures, in addition to equity/venture capital, and possibly community, municipal, state and federal sources of financing that may or may not come with discounted and/or favorable financial caveats and terms.

Tax management

If a business is new or pre-existing, the probability is an accountant may know ways to organize the business finances in such a way as to reduce taxes. This in turn keeps more money available for future and/or present use within the business. Examples of such methods include re-incorporation, income relocation, and legal tax shelters such as tax deferral, capital gains conversion and good use of taxable income deductions.

Debt restructuring

Since many companies operate with some form of debt this can have implications on operating margins, taxation, leveraging and interest payments. Balancing these business items to optimally increase retained earnings, corporate growth and profit margin is something accountants are more likely to be good at than the human resources department for example. Moreover, through low interest financing, debt expensing techniques and non-taxable equity financing a business may be able to organize its debt financing so as to beneficially increase overall cash flow and/or profit margins.

Capital integration

Capital integration is the management of a business' capital investments. Financing from owner investment, external organizations or sources, and retained earnings are all capital. How this capital is used within the business determines how well it can perform in terms of acquiring additional sources of financing, inspiring confidence in the businesses' financial statements, obtaining the most product and/or service for the lowest cost etc. In other words, making the most of capital by optimizing its use through cost reductions, application on financial statements and attaining new capital or debt financing is an additional ability accountants may possess.

Audit control

Since certified accountants are unique in their ability to provide professional audits i.e. inspection and certification of accuracy of a business' financial records, having such audits performed can be beneficial to a businesses financing indirectly. Audits by reputable accountants and/or accounting firms inspire confidence in businesses record keeping which in turn can facilitate improved capital investing. Also, since business tax returns may be re-audited by a government tax and revenue service, having a company's financial records pre-audited may allow for a more expedient tax return.

The techniques and examples provided above outline a few of the ways accountants can assist in the funding of businesses. Accountants are often equipped and able in numerical, and financial management of business fiscal concerns. This capacity can enable accountants to assist in the development and implementation of helping businesses find and generate funding for project development, operations and other business ventures.

Understanding the Income Statement

Income statements are one of three high profile accounting documents that summarize a companies earnings after expenses have been subtracted from revenue. The income statement is a statement of corporate profitability for a given time period whether it be quarterly or annually. Depending on whether a company is private or public, income statements are either made public via the securities and exchange commission in the case of public companies or private only made viewable by key corporate and ownership parties of interest.

The income statement is important because it demonstrates to corporate ownership how a company is performing, The income statement is also a necessary document for tax reporting requirements and is thus essential. These documents can also be audited by accounting organizations that do not have an obvious conflict of interest. Statements by auditors claiming the income statements comply with Generally Accepted Accounting Principles (GAAP) provide some credibility to the accuracy of the income statement.

Income statement items

The income statement is broken down into several lines on which positive or numerical values appear. These values may appear on a number of financial reports such as 10K annual reports, corporate prospectus', financial websites, or as downloaded or prepared on spreadsheets. The positive values are associated with income from revenue, and the negative values include cost of goods sold, expenses, depreciation, amortization and dividends paid. The retained earnings at the bottom of an income statement is often considered the most important number on the income statement, hence the phrase 'the bottom line'.  This number reflects the amount of revenue not spent by the company and may increase the net worth of the company and its shareholders. Some of the key values are listed below:

• Sales or Revenue: This is hopefully a positive number at the top of the statement
• Operating Expenses or Cost of Goods Sold (COG): This is always a negative number
• Net earnings after COG: This is the difference between Sales and COG
• Depreciation and Taxes: Also a negative number subtracted from Net earnings
• Net Earnings after Depreciation and Tax: Hopefully earnings are still positive
• Dividends paid out: This is a negative number that is subtracted from the last net earnings.
• Retained Earnings: After all is subtracted and tallied what is left is either a net gain or loss for the company.

Not every income statement is exactly the same as some companies don't pay dividends or have property that depreciates. For example, a small sole proprietorship or partnership may have no shareholders or dividend paying shares. They may also have had a net loss the prior year which can be carried forward to the following years gains reducing or eliminating taxes. Thus, there are unique tax related and business type factors that influence what expenses a business has to put on its income statement.

Income statements are financial statements that report a companies revenue, expenses and retained earnings for a period of time. These documents are snapshots of a company's financial performance and can also be used for calculating financial profitability metrics such as return on revenue (ROE), and Profit Margin on Sales. Income statements are also required by the Internal Revenue Service in order to report taxable earnings if any. 

These financial statements can be prepared by accountants or those familiar with a company's finances and financial record keeping. Income statements are considered important documents by shareholders, corporation owners and taxation authorities because of their ability to illustrate a company's financial performance. Income statements are either prepared every 3 months of a fiscal year or 1 time a year or both quarterly and annually.

The Difference Between Financial Assets and Liabilities

Simply put, assets are worth something and liabilities are not. Assets add financial value to a company's balance sheet whereas liabilities take away financial value. Nevertheless, both assets and liabilities are important because they facilitate business operations and profitability. In other words, both assets and liabilities serve useful business purpose(s).

A good rule of thumb in terms of business operations is to never have more liabilities than assets. That is to say the current ratio, which is assets/liabilities should have a value of around 1, however a current ratio of 2 may be more conservative and safer. Knowing how much liability to take on should ideally be weighed with earnings forecasts, interest rates on liability if any, and opportunity cost of not taking on additional financing for project development and/or operations.

Classification of assets and liabilities

Although assets and liabilities are both often divided into "short term (current)" and "long term (fixed)" categories on corporate financial statements, their value to a company and actual function is different. Moreover, what is commonly known as a short term or current" is liquid i.e. convertible into cash in the case of assets and payable on a short time scale in the case of the liabilities. Long term assets and liabilities differ from short term liabilities in that the assets are more difficult to convert into cash i.e. non-liquid, and the liabilities have a longer repayment schedule.

Examples of current assets include cash accounts, accounts receivable (if accrual accounting is used), and in stock inventory. Long term assets include items such as property, and equipment that cannot be quickly be sold. Similarly, short term liabilities may include accounts payable, and short-term debt instruments such as vendor credit accounts. Longer term or fixed assets can include commercial mortgages, machinery debt or other debt that is payable in full over a longer term time horizon.

Distinguishing the advantages of assets and liabilities

Another way to distinguish the difference between assets and liabilities is to understand the difference in advantages between the two. Moreover, if liabilities had no advantages, it is probable businesses would not bother with them at all as owing money in and of itself is not often perceived as financially favorable. The following lists illustrate the advantages of both assets and liabilities.

Advantages of Assets:

• Provide liquidity for a business

• Reserve assets allow for future investment opportunities

• Assets can be used as collateral for liabilities

• Can improve financial metrics i.e. business performance as measured by financial statements

• Are an essential part of business operations

It is clear from the above points, assets are essential to a business operation because they provide financial leverage, soundness, opportunity, and liquidity in addition to being a simple function of the fact that businesses usually must have assets of one kind or another to operate be it equipment, transportation, office supplies etc. The advantages of liabilities are different from those of assets as shown below:

Advantages of Liabilities:

• Finance project development

• Facilitate cash flow

• A necessary component of accrual accounting

• Make possible additional business opportunities

The effect of assets and liability on business performance

Knowing how much assets to have in either short term or long term form can affect business performance just as ascertaining the ideal amount of debt to maximize operational success is important. There are a few ways this can be achieved including ratio analysis, market research and business assessment. Each of these methods helps determine the "ideal" level of assets and liabilities necessary to achieve business objectives, financial stability and optimal profit margin.

To illustrate the above, too much stock inventory can be an asset that costs money to keep because storage costs increase overhead expenses that cost a business money. Therefore, assessing how much inventory is needed can help reduce expenses thereby preserving business worth. Another example is how too much debt can end up being not worthwhile. That is to say, if debt is taken on to finance a business project at a cost of 8% annualized and the project only yields a return of 7% of the investment, that debt is failing to pay off. Many different dynamics and relationships between assets, liabilities and business performance exist within businesses and that is why it is helpful to understand the differences between assets and liabilities.

To recapitulate, assets are the items in a business that have value such as cash, vehicles, money to be received, property etc. whereas liabilities are often debt instruments such as loan payments, credit accounts, mortgages etc. Both assets and liabilities are important to a company's success because they both help finance business activities which are aimed at generating profit.

A business without liability may be more difficult to operate due to limited cash flow and may miss opportunities to generate greater income whereas a business with liabilities may operate more successfully, and make possible transactions that would otherwise be impossible ex. credit shipping orders of inventory. Thus, assets and liabilities can be distinguished in three ways, 1) their numerical effect on business valuation both physically and on paper, 2) unique advantages to a business and 3) different influences of assets and liabilities on business performance. While on the surface, assets and liabilities are quite easy to define, they do tend to have subtle yet important impacts on business that help further distinguish them beyond the traditional meanings.

Sources:

1. http://www.allbusiness.com/accounting-reporting/assets/1257-1.html
2. http://ezinearticles.com/?The-Importance-of-the-Balance-Sheet-as-a-Financial&id=513212
3. http://www.stock-market-investors.com/stock-investing-basics/importance-of-current-assets-and-current-liabilities.html