Assets, Liabilities, and Net Worth Chapter 3

Document Type
Essay
Pages
6 pages
Word Count
1881 words
School
N/A
Course Code
accounting
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.
25
C H A P T E R
3
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,
the inventory should be converted to business use within 1 year; thus, it too is considered
26 Chapter 3 Assets, Liabilities, andNet Worth

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