Assets and Liabilities

Assets and Liabilities, terms used in economics and accounting. Assets represent property or rights to property and liabilities are debts owed to others. Assets and liabilities together determine the wealth of an individual, a firm, or a nation.

An entity's wealth is measured as of a specified date and is often listed on a balance sheet, with assets on one side and liabilities and owner's equity on the other (see Accounting and Bookkeeping). However, individuals, firms, and nations have somewhat different assets and liabilities.

An individual's assets might include cash, bank deposits, stocks, rights to future pension payments, and a house and its contents. An individual's liabilities might include, for example, a home mortgage, debt incurred on a car or other personal possessions, or other financial commitments, such as income tax liabilities.

The composition of assets and liabilities for a firm would be different. Included among a firm's assets might be its plant and machinery, its inventories of raw materials or goods in the process of production, or finished goods not yet delivered to customers. A firm's assets should include receivables—debts owed to the firm, perhaps for goods delivered but not yet paid for—and income from any financial assets the firm might have, such as stocks or bonds. Firms will also usually be more valuable than the sum of their assets because they expect to earn income as a result of the existence of the firm as a going concern, a unit producing goods or services for customers. This is commonly defined as goodwill. On the liability side of the balance sheet, the firm will have its financial obligations—debts owed to suppliers or other obligations, such as outstanding tax liability. If the firm has borrowed money from a bank or issued bonds to raise money, these obligations would be listed as liabilities as well.

A nation has still another set of assets and liabilities. A national balance sheet will not simply be the sum of the balance sheets of individuals and firms. A nation's assets also include national capital, such as public buildings (including public libraries, royal palaces, and government offices); publicly owned parts of the transportation infrastructure; or certain natural assets, such as raw material deposits, or national forests. These items may not be included on the balance sheet of any other entity. It is also arguable that since the most important asset of a nation is its labor force, it should be included on the balance sheet in some way. Obligations and liabilities between firms and individuals in the same country will cancel out—one person's liability to pay is another person's asset. But a nation may own assets (physical or financial) overseas, and foreigners may own capital (physical or financial) within a nation. The accounting of a nation's wealth, therefore, should take account of net liabilities to the citizens, firms, and governments of other countries.