1.     Assets

An asset is anything a company owns that has quantifiable value. A business owner should be able to convert an asset into cash—a process called liquidation. Most of the time, they are positives (+) and are further divided into two sub-categories: current and non-current assets.

The simplest way to differentiate between these two groups is to set a threshold of one year after the balance sheet date. Think about it this way—if assets are primarily held for trading or are expected to be sold, used, or otherwise realized in cash within one year, they are labeled as current assets.

Common examples of current assets in the Balance Sheet include:

• Inventories
• Trade receivables
• Cash and cash equivalents
• Marketable securities

From an accounting perspective, assets that will be used over a longer period are defined as non-current, long-term, long-lived, or fixed assets. They won’t be converted into cash within the next 12 months.

Common examples of non-current assets in the Balance Sheet include:

• Property, plant, and equipment (PP&E)
• Intangible assets, such as Intellectual Property
• Financial assets
• Deferred tax assets

To understand the difference between the two sub-categories, here’s a simplified Balance Sheet example. If receivables from clients are to be collected by the end of next year, then we report them as trade receivables under the current assets. Some of them, however, may be overdue or scheduled for receipt later than 31^st December next year. That’s longer than a year, so we label such receivables as non-current.

2.     Liabilities

In Financial Analysis, assets and liabilities are the two sides of the same coin. They are two Balance Sheet accounts that affect each other. While an asset has a positive value, liabilities are tallied as negatives (-) because they represent the debts owed by a company.

Those to be settled within a year after the reporting date are classified as current liabilities. For example, most companies pay their suppliers in 30 to 90 days, and even though various payment periods may apply, they are usually shorter than 1 year. That’s why trade and other payables are always included in the current liabilities section of the Balance Sheet.

Current income tax payable is normally due three months after the balance sheet date, so you will find it in the current liabilities section, too. So are borrowings which are due within 12 months.

Other examples of current liabilities in the Balance Sheet include:

• Payroll liabilities
• Utilities due
• Rent liabilities

Non-current liabilities, on the other hand, are obligations expected to be settled after more than one year of the balance sheet date. Some of the common items in this group are long-term borrowings and retirement benefit obligations owed to employees.

Other examples of non-current liabilities in the Balance Sheet include:

• Leases
• Deferred tax liabilities
• Bonds payable

Here’s a balance sheet example to better understand the difference between current and non-current liabilities. Suppose your company has just taken out a loan for $100,000 with a repayment term of 5 years, which you’ll pay in equal annual installments. The first portion of $20,000 that’s due within the next 12 months falls into the current liabilities section because it is an obligation you must settle in the short term. And the remaining $80,000 are considered non-current, as you have longer than a year to pay it off.

3.     Equity

Total Equity, also known as net worth, represents the owners’ residual interest in a company’s assets, after paying off its liabilities. To calculate the Owners’ Equity of an organization, one must subtract Total Liabilities from Total Assets. If a firm was to liquidate its assets and liabilities, Owners’ Equity would be the amount shareholders received. Therefore, many consider it to be an illustration of a firm’s net worth or book value.