Assets & Liabilities

Key terms for understanding what your business owns, owes, and the owner's stake in the company.

Assets

Everything your business owns or controls that has economic value. Assets appear on the left side of your Balance Sheet and represent resources that provide future economic benefits.

The accounting equation: Assets = Liabilities + Equity

Asset categories in Fiskl:

• Current Assets (convertible to cash within one year)
• Long-term Assets (held for more than one year)

Current Assets

Assets expected to be converted to cash, sold, or consumed within one year or within the business's normal operating cycle.

Examples:

• Cash and bank accounts
• Accounts receivable
• Inventory
• Prepaid expenses
• Short-term investments

Why current assets matter: They indicate your business's ability to pay short-term obligations and maintain operations.

Long-term Assets

Assets held for more than one year that support long-term business operations. Also called non-current assets or fixed assets.

Examples:

• Property and buildings
• Equipment and machinery
• Vehicles
• Furniture and fixtures
• Long-term investments
• Intangible assets (patents, trademarks)

Fixed Assets

Tangible long-term assets used in business operations that are not expected to be converted to cash within one year. Fixed assets typically depreciate over time.

Common fixed assets:

• Buildings and land
• Office equipment
• Computer hardware
• Manufacturing equipment
• Vehicles

In Fiskl: Track fixed assets and their depreciation for accurate Balance Sheet reporting and tax purposes.

Cash

Physical currency, bank account balances, and other immediately available funds. Cash is the most liquid asset and appears first on your Balance Sheet.

Cash types in Fiskl:

• Cash on hand (petty cash)
• Checking accounts
• Savings accounts
• Money market accounts

Bank Account

An account held at a financial institution where you deposit and withdraw money. In Fiskl, bank accounts are asset accounts that connect to your real bank accounts for automatic transaction imports.

Types:

• Checking accounts (day-to-day operations)
• Savings accounts (cash reserves)
• Business money market accounts

Cash Equivalents

Short-term, highly liquid investments that can be quickly converted to cash with minimal risk of value change. Cash equivalents typically mature within three months.

Examples:

• Treasury bills
• Money market funds
• Commercial paper
• Short-term government bonds

Accounts Receivable

Money owed to your business by clients or customers for goods or services delivered on credit. Accounts receivable are current assets that represent future cash inflows.

Example: You invoice a client $5,000 on January 15th with Net 30 payment terms. Until the client pays, you have $5,000 in accounts receivable.

In Fiskl: Accounts receivable automatically increase when you send invoices and decrease when you receive payments.

tip

Monitor your accounts receivable with the Client Aging Report to track overdue invoices and improve collections.

Receivables

Another term for accounts receivable, referring to all amounts owed to your business.

Inventory

Goods and products held for sale to customers, including raw materials, work-in-progress, and finished products. Inventory is a current asset valued at cost or market value, whichever is lower.

Inventory types:

• Raw materials
• Work-in-progress
• Finished goods ready for sale

Example: A retailer has $25,000 worth of products on shelves, recorded as inventory until sold.

Prepaid Expenses

Payments made in advance for goods or services to be received in the future. Prepaid expenses are current assets that convert to expenses over time as you receive the benefit.

Common examples:

• Prepaid rent (paying three months in advance)
• Prepaid insurance (annual policy paid upfront)
• Prepaid subscriptions
• Advance deposits

Example: You pay $12,000 for annual insurance on January 1st. This is a prepaid expense that converts to insurance expense at $1,000 per month.

Liabilities

Obligations or debts your business owes to others. Liabilities appear on the right side of your Balance Sheet and represent claims against your assets.

Liability categories in Fiskl:

• Current Liabilities (due within one year)
• Long-term Liabilities (due after one year)

Current Liabilities

Obligations due for payment within one year or within the business's normal operating cycle.

Examples:

• Accounts payable
• Credit card balances
• Short-term loans
• Accrued expenses
• Sales tax payable
• Payroll liabilities

Why current liabilities matter: Compare with current assets to assess short-term financial health and liquidity.

Long-term Liabilities

Obligations not due for payment within one year. These are long-term financing sources that support business growth and major purchases.

Examples:

• Mortgages
• Business loans (term loans)
• Equipment financing
• Bonds payable
• Long-term leases

Accounts Payable

Money your business owes to vendors and suppliers for goods or services purchased on credit. Accounts payable are current liabilities representing future cash outflows.

Example: You receive $3,000 worth of inventory from a supplier on January 10th with Net 30 terms. Until you pay, you have $3,000 in accounts payable.

In Fiskl: Track vendor bills and payment due dates to manage cash flow and maintain good supplier relationships.

Payables

Another term for accounts payable, referring to all amounts your business owes to suppliers and vendors.

Credit Card

A payment card that allows you to borrow funds up to a credit limit for purchases or cash advances. In Fiskl, credit cards are liability accounts that track outstanding balances owed.

Business credit cards:

• Company credit cards
• Business charge cards
• Corporate cards

In Fiskl: Connect credit cards as liability accounts to automatically import transactions and track spending.

Loan

A sum of money borrowed from a lender that must be repaid with interest according to specific terms. Loans can be current liabilities (due within one year) or long-term liabilities.

Common business loans:

• Term loans
• Lines of credit
• Equipment financing
• Commercial mortgages
• SBA loans

Example: A $50,000 business loan with a five-year term and 6% interest rate is a long-term liability.

Mortgage

A loan secured by real property (real estate) where the property serves as collateral. Mortgages are typically long-term liabilities with terms of 15-30 years.

Example: A $300,000 commercial property mortgage with monthly principal and interest payments.

Accrued Expenses

Expenses incurred but not yet paid or invoiced. Accrued expenses are current liabilities that recognize costs in the period they occur, regardless of when payment is made.

Common accrued expenses:

• Accrued salaries (earned but not yet paid)
• Accrued interest on loans
• Accrued utilities
• Accrued taxes

Example: Employees work the last week of December, but payroll processes in January. You accrue the December wages as an expense and liability in December.

Deferred Revenue

Money received from customers for goods or services not yet delivered. Deferred revenue is a current liability because you owe the customer the product, service, or a refund.

Also called unearned revenue or advance payments.

Examples:

• Annual subscription paid in advance
• Deposit for future services
• Prepayment for products not yet shipped
• Retainer fees for upcoming work

Example: A client pays $12,000 upfront for 12 months of consulting. Each month, $1,000 moves from deferred revenue (liability) to revenue (income).

Equity

The owner's residual interest in the business after deducting liabilities from assets. Equity represents the owner's stake in the company.

Accounting equation: Equity = Assets - Liabilities

Equity components:

• Owner's capital (initial and additional investments)
• Retained earnings (accumulated profits)
• Owner's drawings (withdrawals)

Owner's Equity

The portion of the business owned by the owner(s), calculated as total assets minus total liabilities. Owner's equity increases with profits and additional investments, decreases with losses and withdrawals.

For sole proprietors and partnerships: Owner's equity includes capital contributions and retained earnings.

For corporations: Called shareholders' equity or stockholders' equity.

Capital

The owner's investment in the business, including initial startup funds and additional contributions. Capital is part of equity and represents the owner's financial stake.

Example: You invest $50,000 to start your business. This $50,000 is your initial capital contribution.

Retained Earnings

Cumulative net profits (or losses) kept in the business rather than distributed to owners. Retained earnings grow as your business generates profit and shrink when you take distributions or incur losses.

Calculation: Beginning Retained Earnings + Net Profit - Distributions = Ending Retained Earnings

Example: Your business earns $100,000 profit this year. If you distribute $30,000 to yourself, retained earnings increase by $70,000.

Drawings

Money or assets withdrawn from the business by the owner for personal use. Drawings reduce owner's equity but are not expenses—they represent a return of capital to the owner.

Example: You withdraw $5,000 from your business bank account for personal expenses. This is recorded as drawings, reducing your equity.

note

Drawings are different from salary. Owners of sole proprietorships and partnerships typically take drawings rather than salaries.

Distribution

Payments made to business owners from profits. Similar to drawings but typically used for corporations and partnerships. Distributions reduce retained earnings.

Types:

• Cash distributions
• Property distributions
• Stock dividends (for corporations)

Current Ratio

A liquidity ratio calculated by dividing current assets by current liabilities. The current ratio measures your ability to pay short-term obligations.

Formula: Current Ratio = Current Assets ÷ Current Liabilities

Example: Current assets of $100,000 and current liabilities of $50,000 give a current ratio of 2:1.

Interpretation:

• Ratio above 1.0: You can cover current liabilities
• Ratio below 1.0: Potential liquidity issues
• Ideal ratio: Typically 1.5 to 3.0 depending on industry

Working Capital

The difference between current assets and current liabilities. Working capital represents the funds available for day-to-day business operations.

Formula: Working Capital = Current Assets - Current Liabilities

Example: Current assets of $150,000 minus current liabilities of $75,000 equals $75,000 in working capital.

Positive working capital: Indicates ability to fund operations and pay obligations.

Negative working capital: May indicate financial stress or aggressive cash management.

Depreciation

The systematic allocation of a fixed asset's cost over its useful life. Depreciation reflects the asset's declining value as it's used in business operations.

Common depreciation methods:

• Straight-line (equal amount each period)
• Declining balance (accelerated depreciation)
• Units of production (based on usage)

Example: A $10,000 computer with a five-year useful life depreciates $2,000 annually using straight-line depreciation.

In Fiskl: Track depreciation to accurately reflect asset values on your Balance Sheet and claim tax deductions.

Accumulated Depreciation

The total depreciation recorded on a fixed asset since purchase. Accumulated depreciation is a contra-asset account that reduces the asset's book value on the Balance Sheet.

Formula: Book Value = Original Cost - Accumulated Depreciation

Example: A $50,000 vehicle with $20,000 accumulated depreciation has a book value of $30,000.

Net Worth

Another term for equity, representing the business's total value after subtracting liabilities from assets. Net worth indicates the financial health and value of your business.

For personal finances: Total assets minus total liabilities.

For businesses: Equivalent to owner's equity or shareholders' equity.

Liquidity

The ease with which assets can be converted to cash without significant loss of value. High liquidity means you can quickly access cash to meet obligations.

Liquidity spectrum:

• Most liquid: Cash, checking accounts
• Highly liquid: Savings accounts, money markets
• Moderately liquid: Accounts receivable, short-term investments
• Less liquid: Inventory, prepaid expenses
• Illiquid: Fixed assets, real estate

Why liquidity matters: Ensures you can pay bills, handle emergencies, and seize opportunities without disrupting operations.

Solvency

The ability to meet long-term financial obligations and continue operations indefinitely. A solvent business has total assets greater than total liabilities.

Solvency vs. Liquidity:

• Liquidity: Can you pay bills this month?
• Solvency: Can you sustain operations long-term?

Example: A business with $500,000 in assets and $200,000 in liabilities is solvent (positive equity of $300,000).