Preparation of Final Accounts of Sole Proprietor

Classification of Assets and Liabilities

Difference between assets and liabilities is assets gives you future financial benefit, and on the other hand, liabilities will give you a future obligation. The proportion of assets to liabilities should always be higher. The difference between assets and liabilities is your equity in the company. We classify these assets and liabilities into different parts. This classification of assets and liabilities helps in arranging assets and liabilities in a proper manner in the balance sheet.

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Classification of Assets and Liabilities:

Classification Of Assets:

  1. Fixed Assets
  2. Current Assets
  3. Liquid Assets
  4. Wasting Assets
  5. Intangible Assets
  6. Fictitious Assets

1.Fixed Assets:

Fixed Assets are those assets which are not to be sold by the firm and to be used for a long period of time, such types of assets are also known as Long-term Assets.

For example, land and building, plant and machinery, vehicles, equipment, patents, trademarks etc, are examples of Fixed Assets.

2. Current assets:

Currents assets are those assets which can be converted into cash easily from the market. Generally within a year. For example cash in hand, cash at bank, trade receivables, inventory, etc.

3. Liquid Assets:

Liquid Assets are those which are already in the form of cash or can easily be convertible into cash and has a negligible effect on the price available in the market.

For example marketable securities, government bonds, certificates of deposits etc.

4. Wasting Assets:

Wasting Assets are the assets that have a useful life and as we use it depreciates with the time and after some time or years, it becomes useless.

For example Natural resources such as gas, timber, coal. The value of these assets goes down as we take out the contents. And when we take out these completely, it will become useless.

5. Intangible assets:

Intangible Assets are the assets which cannot be seen or touched. These are not necessarily useless.

For example goodwill, patents, copyrights, etc.

6. Fictitious Assets: 

The assets which are valueless but are shown in the financial statements or the expenses which are treated as assets are known as Fictitious Assets.

For example, preliminary expenses which incur at the time of establishment of the company.

 

assets and liabilities

(source – infonigeria)

Classification of Liabilities:

We can classify the liabilities into three parts. These are:

  1. Long-term liabilities
  2. Fixed Liabilities
  3. Current Liabilities
  4. Contingent Liabilities

1.Long-term liabilities:

Long-term liabilities are those which exists for one or more than one year. For example a long-term loan from the bank.

2. Fixed Liabilities:

Liabilities which are paid at the time of termination of the business are known as Fixed Liabilities.

For example proprietor’s capital.

3. Current liabilities:

Current liabilities or short-term liabilities are those which are to be settled within a year.

For example trade payables, creditors, outstanding expenses, etc.

4. Contingent Liabilities:

Liabilities which are not actual liabilities but these can become the actual liability and it depends on the happening of certain events.

If such events do not occur, such liability will also not incur. Thus, we do not show such liabilities in the balance sheet of the company.

For example lawsuits, pending investigation, bill discounted etc.

Solved Question for you: 

Classify the following assets and liabilities mentioning their sub-head:

  1. Land and Buildings
  2. Cash at bank
  3. Preliminary expenses
  4. Government bonds
  5. Trade payables
  6. Loan from the bank

Answers:

  1. Land and buildings are fixed assets, hence we show them under the Non-Current Assets and sub-head Fixed Assets.
  2. Cash at the bank is shown under Current Assets and under sub-head Cash and Cash Equivalent.
  3. Preliminary Expenses are those which we incur at the time of establishing the business. These are fictitious assets and do not appear in financial statements.
  4. Government bonds are liquid assets and thus we show them under Current Assets and sub-head Current Investments.
  5. Trade Payables are current liabilities and thus we show them under Current Liabilities.
  6. Loan taken from the bank is a long-term liability. Therefore, we show it under Non-Current Liabilities and under subhead Long-Term Borrowings.
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