Every business owner knows that as you work to get your business up and running, you take on debt through loans, purchase items, or put money directly into your business. All of this makes up your balance sheet.

Each time you process a transaction, it gets recorded on your balance sheet as either an asset or a liability. Now, what does that mean?

Assets: Consists of items or resources of value that the business owns. Assets can produce revenue and contribute enduring benefits to the owner. Assets are made up of property, investments, inventory, patents, equipment, and more.

Liabilities: Any existing debts a business still owes another entity, such as a business, vendor, employee, organization, lender, or government agency. Liabilities typically help owners finance their companies and are comprised of short-term debts like credit card balances, accrued expenses, deferred tax payments, loans lasting for more than a year, or other noncurrent liabilities such as leases.

Differences between Assets and Liabilities

Let’s look at a comparison:

Assets

• Made up of items of value
• Owned by the business
• Builds revenue for the business
• Produces long-lasting benefits for the business

Liabilities

• Debts owed to another business or entity
• Can help finance business operations
• Exist as an expense for the business
• Are able to be used for purchasing assets