Assets And Debts

Assets and debts (also called liabilities) are fundamental financial concepts that describe what a person or business owns versus what they owe.

• Assets are resources or items of value owned by an individual or business that provide future economic benefit. They can be tangible (physical) like cash, property, vehicles, equipment, or inventory, or intangible like patents, trademarks, or goodwill. Assets increase the net worth or equity of the owner because they represent value that can be used or converted into cash in the future.

• Debts (or liabilities) are financial obligations or amounts owed to others. They represent money that must be repaid in the future, often with interest. Examples include loans (mortgages, auto loans, personal loans), credit card balances, and accounts payable. Debts reduce the net worth because they are claims against the assets.

In summary, the difference between assets and debts determines the net value or equity of a person or business:

[ \text{Net Worth (Equity)} = \text{Assets} - \text{Debts (Liabilities)} ]

For example, if a business has assets worth £10,000 and debts of £8,000, its net assets or owner's equity is £2,000.

This distinction is crucial for understanding financial health, whether for personal finance or business accounting.