Balance Sheet – M Hernandez Income Taxes Bookkeeping

October 23, 2019December 10, 2020

Liability Vs Expense

What Is the Difference Between an Expense and a Liability?

Now you know what a liability and a expense is. A liability is something a business owes. A expense is something a business paid.

Can you tell the difference between a business expenses and a business liability?

A business expense is the cost of operations that a business incurs to generate revenue. Expenses are related to revenue, and both are listed on a business income statement. In short, expenses are used to calculate Net Income.

REVENUE – EXPENSES = NET INCOME

For example, if a company has more expenses than revenues for the past three years, it may signal weak financial stability because it has been losing money for those years.

A business liability is what the business owes over a period of time and incurred to keep the business open. Liabilities are related to assets, and both are listed on a business balance sheet. In short, liabilities are used to calculate Equity.

ASSETS = LIABILITIES + EQUITY

Expenses and liabilities should not be confused with each other. One is listed on a company’s balance sheet, and the other is listed on the company’s income statement. Expenses are the costs of a company’s operation (paid now), while liabilities are the debts a business owes (not paid but needs to pay at some point).

October 11, 2019December 10, 2020

The 5 Main Account Types: Liabilities

The second main category to grasp is the liability account.

What is a Liabilities?
A liability is, tangible or intangible, that a business owes and must pay to someone else (the IRS counts as someone else).

Think of a liability as everything your business owes that will have to be paid for with cash or services. For example, your business most likely owes taxes, business loan, wages, mortgages, deferred revenue, and accounts payable (think accounts to pay).

What Business Financial Report Shows Liabilities?
Balance Sheet

Types of Business Liabilities

Current Liabilities
Non-Current Liabilities
- Long Term Liabilities

Current Liabilities

Current liabilities are all liabilities of a business that are due within 1 year.

The most common current liability include accounts payable, taxes, and payroll wages.

Non-Current Liabilities (AKA Long Term Liability)

Non-Current Liabilities, often called Long Term Liability is a liability a business that will be due over 1 year.

The most common long term liability are business loans, mortgage loans, and vehicle loans.

Liabilities on the Business Balance Sheet

Liabilities are important to a businesses because it tells the owner what is owed to debtors.

Bring it Home: Liabilities and Assets

Assets are the things a business owns or is owed (need to be received)

Liabilities are the things a business owes or needs to pay.

If a business subtracts its liabilities from its assets, the difference is the business equity.

Come on back soon to read next 5 main account types: Equity.

October 10, 2019December 10, 2020

The 5 Main Account Types: Assets

The first main category to grasp is the asset account.

What is an Asset?
An asset is an item, tangible or intangible, that a business owns and has value.

Think of an asset as everything your business owns that can be sold and converted to cash. For example, your business most likely owns furniture, a computer, a printer, some tools, and cash itself is an asset.

What Business Financial Report Shows Assets?
Balance Sheet

Types of Business Assets

Current Assets
Non-Current Assets
- Fixed Assets

Current Assets

Current assets are all assets of a business that can be used or sold within 1 year.

The most common current assets include cash, inventory, and pre-paid liabilities (think insurance premiums).

Non-Current Assets (AKA Fixed Assets)

Non-Current Assets, often called fixed assets are all assets of a business that will be used or sold over 1 year.

The most common fixed assets are vehicles (company truck), office equipment/furniture, and buildings. Fixed assets have depreciation (we will cover that in a different post).

Assets on the Business Balance Sheet

Assets are important to a businesses because it tells the owner what can be used to fund the business and pay off debtors. Current assets can be used to fund the business or pay operating expenses. Fixed assets show what a business owns that it does not plan to sell and plans to use for the live of the asset. Fixed assets can be used to pay debtors in case the business decides to close.

Come on back soon to read next 5 main account types: Liabilities.