Discussing total assets vs. total liabilities leads to pondering balance sheet tactics. With a strong balance sheet, a company can wield its financial resources to make money, stop a dwindling bottom line and gradually erode rivals’ market share. This ability to manage an internal operating slump or an adverse economic environment goes a long way toward easing the concerns of investors and lenders who fret about credit risk and insolvency.
Total Assets vs. Total Liabilities
A company's assets run the gamut from cash and merchandise to production equipment, customer receivables, intellectual property and computer gear. Total liabilities include bonds payable, commercial paper, salaries, taxes due and vendor payables. While total resources differ from total liabilities, both items interrelate in operating activities. A business typically borrows, raises equity or uses its own money to purchase assets. Another area of proximity lies in the fact that assets and liabilities both flow into a balance sheet.
Finance people use the terms “statement of financial position” or “statement of financial condition” when referring to a balance sheet because this data summary provides insight into things such as solvency, efficiency and liquidity -- a trifecta that demonstrates financial health. A solvent business has total assets greater than total liabilities, which are the debts or financial commitments. Liquidity pertains to tools an organization relies on to keep coffers flush with capital, whereas efficiency is the mark of an operation that doesn’t waste time, energy and money.
Factoring Intangibles in Net Worth
If you comb through a company’s statement of financial position, you see tangible assets but also intangible resources -- those lacking physical substance. Despite their intangible quality, nonphysical resources -- such as trademarks, customer goodwill and contract exclusivity rights -- make it into total assets and contribute to a corporation’s net worth. This is how business commentators call corporate equity, which equals total assets minus total debts. A solvent business always has a positive net worth.
Human resources management plays a key role in preparing and reporting a legally compliant balance sheet. Corporate leadership takes tangible steps to show employees how to record asset and debt data, report bookkeeping problems, conform to the law and publish accurate financial statements. Hiring policies and a system of ongoing training and performance reviews also help to ensure high quality in financial reporting and balance sheet preparation. Besides a balance sheet, a business must publish other data summaries -- such as an income statement and a cash flow report -- at the end of each quarter and fiscal year.
- Jupiterimages/Goodshoot/Getty Images