What is the difference between assets and expenses

Assets and liabilities

In contrast to Profit and Loss Account (P&L), which covers a defined period (usually a fiscal year), the balance sheet refers to a key date. This means that it provides information about the financial situation of a company at a specific point in time.

In double-entry bookkeeping, a business transaction is posted to accounts that each consist of two pages. This is the debit side and the credit side. Similar to a so-called T account the company's balance sheet also consists of two columns, the left column being labeled assets and the right column being labeled liabilities. The commercial law structure of the balance sheet is regulated by the HGB (Commercial Code). The assets and assets of the company are shown on the assets page. This includes everything that defines the actual value of the company, such as fixed assets. On the other hand, the liabilities side presents the equity, i.e. the sources from which the assets result.

The passive side, or also Capital side called, therefore provides information about the origin of the financial resources and capital, whereas in the assets column (Asset side) its use is documented.

A “rough” subdivision of the assets column is made into assets

  • Fixed assets and
  • Current assets,

the liabilities column is in

  • Equity and
  • Borrowed capital

divided.

In addition, there are deferred items on both sides.

The points just mentioned will be discussed in more detail below.

assets

The company's fixed assets include, for example, real estate, but also the company's vehicle fleet, financial assets such as savings accounts, active difference from asset settlement, deferred tax assets or investments in other companies.

On the one hand, cash and business accounts (current account), i.e. available funds, and on the other hand, stocks of raw and auxiliary materials or finished products are added to the current assets.

Trade accounts receivable are also allocated to current assets. Trade accounts receivable are claims that the entrepreneur makes on his debtors. This can be, for example, invoices that he has sent to his customers, but which have not yet been paid.

liabilities

The Borrowed capital The liabilities side consists of actual debts such as bank loans, deferred taxes or third-party investments, as well as so-called provisions. The term provisions - not to be confused with reserves - that are allocated to equity are to be understood as liabilities to be expected which will most likely occur but the exact amount of which is not (yet) known. This sometimes includes tax and pension provisions, i.e. payments that have not yet been made but will have to be made in the foreseeable future.

Debt capital also includes payment obligations that the entrepreneur has towards his creditors, so-called liabilities (from LuL). These can be unpaid invoices that the entrepreneur has received from suppliers but has not yet paid.

The Equity, which also appears on the liabilities side, is in principle the difference between assets and debts. Since in a company balance sheet the sum of the assets and liabilities items must match, it can be determined easily because it corresponds to the amount of money that compensates for the difference between the sum of assets and liabilities.

The balance sheet total, which results from the total of all asset and / or liability items, thus reflects the (current) "value" of the company - based on a reference date.

Accruals and deferrals often appear on both sides of the balance sheet, which are necessary when business transactions require multiple postings that have to be assigned to different accounting periods (e.g. different fiscal years). If, for example, an entrepreneur makes a purchase on target, it can happen that he receives the purchased goods within the current accounting period, but only pays them in the following accounting period. This would have to be posted with a prepaid expenses.

The current account, i.e. the company's business account, has a special position in business accounting. Because as long as this current account is in the credit balance and thus provides the entrepreneur with liquid funds, it is part of the current assets on the assets side. However, if this account is overdrawn by the entrepreneur, for example as part of an overdraft facility, and has a negative balance, the corresponding negative balance is outside capital (liability side), as this can be equated with a loan.

If a company generates a profit that is not or only partially distributed to the company's shareholders, the amount of the profit or the profit share remaining in the company is added to the equity account, so that this increases. In this context, one speaks of a profit carried forward. Similarly, there is also a loss carryforward, through which the equity account is reduced by the amount of the loss, unless the loss is otherwise compensated.

Different business postings can show up in different ways on a business balance sheet. Certain booking processes can only affect the active side or only the passive side, as well as both sides at the same time. These changes in the balance sheet can be broken down into

Active exchange

If the entrepreneur takes a certain amount from the cash on hand and pays it into the business account, a booking will only be made on the assets side. Although one account is reduced by the corresponding value, another is increased by the same value.

Since both accounts are on the same page of the balance sheet, the balance sheet total does not change.

Passive swap

An example of a passive exchange is the so-called Rescheduling. If an entrepreneur has already received a loan from bank A, which he can redeem at any time, and receives a loan offer from bank B at significantly more favorable terms, so that he takes advantage of the offer from bank B to fully or partially extend the loan from bank A. repay, it is a passive exchange.

As with the asset swap, the balance sheet total does not change here either.

In principle, asset and liability swaps have no effect on the balance sheet total. It is different with an asset / liability increase, in which the balance sheet total always increases ("increases") and an asset-liability decrease, which always results in a decrease ("decrease") in the balance sheet total.

Since the balance sheet total corresponds to the company's assets, an increase in the balance sheet total means an increase in assets and a decrease means a loss of assets.

The terms active-passive increase and decrease are described below using simple examples.

Active-passive increase

If an entrepreneur buys a machine on target, which means that he does not have to pay for the machine immediately, his current assets on the assets side increase by the value of the machine, but at the same time the debt capital (trade liabilities) on the liabilities side also increases. Page around the same as long as no payment has been made.

Since both sides of the balance sheet are affected, the balance sheet total increases by exactly the amount that corresponds to the purchase price of the machine.

Since the balance sheet total basically shows the current value of the company, the “company value” has increased by the purchase price of the machine, because this has not yet been paid but is already part of the company.

An increase in the balance sheet total is referred to as a balance sheet extension.

Active-passive reduction

In relation to the above example, an active-passive reduction takes place at the moment when the entrepreneur pays for the machine he has already received. If he makes the payment by means of a bank transfer, the “Bank” active account is reduced, as is the “Liabilities from LuL” passive account. The entrepreneur therefore has fewer debts accordingly.

The balance sheet total is reduced (on both sides, of course) by the purchase price of the machine.

For a reduction in the balance sheet total, the term Balance sheet shortening used.

The above examples involved acquisitions by the company. However, since a company "lives" from its turnover (for example through sales), a sale on target should be mentioned as an example - "on target" because the customer does not have to pay for the goods immediately upon purchase, but to him a payment deadline is set.

If the customer has received the goods but has not yet paid for them within the set period, the stock of goods / products has decreased for the entrepreneur (seller), at the same time the trade receivables have increased by the same amount. Since both accounts on the assets side are to be assigned to the current assets, an asset swap takes place during this process.

If the customer pays for the goods received within the payment period either in cash or by transfer, the cash or account balance on the active side of the entrepreneur increases. At the same time, the trade receivables are reduced by the same amount. Thus, the process of receiving the money also means an active exchange for the entrepreneur.