Assets, Liabilities, and Net Worth Chapter 3

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P r o g r e s s N o t e s

Assets, Liabilities,

andNet Worth

OVERVIEW

Assets, liabilities, and net worth are part of the language

of finance. As such, it is important to understand both

their composition and how they fit together. Short defi-

nitions appear below, followed by examples.

Assets

Assets are economic resources that have expected future

benefits to the business. In other words, assets are what

the organization owns and/or controls.

Liabilities

Liabilities are “outsider claims” consisting of economic

obligations, or debts, payable to outsiders. Thus, liabili-

ties are what the organization owes, and the outsiders to

whom the debts are due are creditors of the business.

Net Worth

“Insider claims” are also known as owner’s equity, or net

worth. These are claims held by the owners of the busi–

ness. An owner has a claim to the entity’s assets because

he or she has invested in the business. No matter what

term is used, the sum of these claims reflects what the

business is worth, net of liabilities—thus “net worth.”

The Three-Part Equation

An accounting equation reflects a relationship among

assets, liabilities, and net worth as follows: assets equal

After completing this chapter,

you should be able to

1. Recognize typical assets.

2. Recognize typical liabilities.

3. Understand net worth

terminology.

4. See how assets, liabilities,

and net worth fit together.

C H A P T E R

liabilities plus net worth. The three pieces must always balance among themselves because

this is how they fit together. The equation is as follows:

Assets 5 Liabilities 1 Net Worth

WHAT ARE EXAMPLES OF ASSETS?

All of the following are typical business assets.

Examples of Assets

Cash, accounts receivable, notes receivable, and inventory are all assets. If the Great Lakes

Home Health Agency (HHA) has cash in its bank account, that is an economic resource—

an asset. The HHA is owed money for services rendered; these accounts receivable are also

an economic resource—an asset. If certain patients have signed a formal agreement to pay

the HHA, then these notes receivable are likewise economic resources—assets. All types

of business receivables are assets. The Great Lakes HHA also has an inventory of medical

supplies (dressings, syringes, IV tubing, etc.) that are used in its day-to-day operations. This

inventory on hand is an economic resource—an asset. Land, buildings, and equipment are

also assets. Exhibit 3–1 summarizes asset examples.

Short-Term Versus Long-Term Assets

Assets are often labeled either “current” or “long-term” assets. Current is another word

for “short-term.” If an asset can be turned into cash within a 12-month period, it is cur-

rent, or short term. If, on the other hand, an asset cannot be converted into cash within a

12-month period, it is considered long term. In our Great Lakes HHA example, accounts

receivable should be collected within 1 year and thus should be current assets. Likewise,

26 Chapter 3 Assets, Liabilities, andNet Worth