Master your business finances: Assets vs. liabilities explained

Published Tuesday 2 September 2025

Table of contents

• What's the difference between assets and liabilities?
• What are small business assets?
• Different types of assets
• What are small business liabilities?
• Different types of liabilities
• Is a liability the same as an expense?
• Reviewing your balance sheets
• Simplify your financial tracking with Xero
• FAQs on assets and liabilities

Key takeaways

• Use Assets − Liabilities = Owner’s Equity to assess your business value and financial health.
• Classify current vs. long-term assets and liabilities to understand liquidity and payment obligations.
• Differentiate liabilities from expenses to manage cash flow effectively.
• Review your balance sheet regularly with an accountant and keep accurate records for compliance.

What's the difference between assets and liabilities?

An asset is something you own in your business that has value and can provide a future benefit, like cash, equipment or inventory. A liability is something you owe to another party, such as a loan or unpaid bills. In short, assets add value to your business, while liabilities are obligations you need to settle.

What are small business assets?

Business assets are everything your company owns that has monetary value. These fall into several categories:

• Physical assets: Buildings, vehicles, equipment, and inventory
• Financial assets: Cash, bank accounts, and investments
• Intangible assets: Patents, trademarks, and brand value. In Canada, the tax treatment of many of these assets falls under the new CCA Class 14.1, which replaced the previous eligible capital property system.

The more assets you have, the higher your business value and the better your financial health.

Examples of small business assets

• Assets can be physical items or non-physical resources. Here are some common examples of assets for small businesses:
• Cash in your bank accounts
• Office equipment, like computers and printers
• Vehicles used for business
• Buildings or land your business owns
• Inventory or stock you plan to sell
• Accounts receivable (money owed to you by customers)

Different types of assets

Asset classification depends on how long you'll own them:

• Current assets: Owned for 12 months or less (cash, inventory, accounts receivable)
• Fixed assets: Owned for longer than 12 months (buildings, equipment, vehicles)

This classification helps you understand your business liquidity and long-term investments.

Fixed assets

Fixed assets are long-term investments your business owns for more than 12 months. They come in two types:

Tangible fixed assets:

• Real estate and buildings
• Vehicles and equipment
• Raw materials and machinery

Intangible fixed assets:

• Patents and copyrights
• Trademarks and brand value
• These may appreciate or maintain value over time

These assets depreciate over time, which affects your profits. Some assets may qualify for an enhanced first-year allowance under the Accelerated Investment Incentive if you acquire and use them within specific timeframes.

Current assets

Current assets are short-term assets that can be quickly converted to cash within 12 months. They fund your daily operations and cover immediate expenses.

Common current assets include:

• Cash: Money in bank accounts and petty cash
• Accounts receivable: Money customers owe you
• Inventory: Products ready for sale
• Prepaid expenses: Insurance or rent paid in advance

What are small business liabilities?

Business liabilities are financial obligations your company owes to others. These include debts, unpaid bills, and future payment commitments. Manage your liabilities so you can meet your financial obligations and maintain good business relationships.

Examples of small business liabilities

Liabilities represent your financial obligations. Common examples include:

• Bank loans or lines of credit (you can deduct certain fees incurred to obtain a loan for business property over five years)
• Accounts payable (money you owe to suppliers)
• Credit card balances
• Wages and salaries owed to employees
• Taxes payable to the government
• Rent for your office or storefront

Different types of liabilities

Liability classification depends on when you must pay them:

• Current liabilities: Due within 12 months (bills, salaries, short-term loans)
• Long-term liabilities: Due beyond 12 months (mortgages, long-term loans)

Keep your total liabilities lower than your total assets to maintain positive business equity and financial health.

Current liabilities

Current liabilities are debts you must pay within 12 months, often within just a few months. These cover your daily business operations.

Common current liabilities include:

• Accounts payable: Money owed to suppliers
• Staff salaries: Wages and benefits due to employees
• Credit card bills: Business credit card balances

Bank overdraft fees: Short-term banking charges

Long-term liabilities

Long-term liabilities are debts payable beyond 12 months. These typically involve larger amounts and structured payment plans.

Common long-term liabilities include:

• business loans for multiple years
• mortgages with extended terms
• deferred taxes due in future periods

Is a liability the same as an expense?

While liabilities and expenses both represent money flowing out of your business, they are fundamentally different and serve distinct purposes in financial reporting.

Expenses are the costs of running your business day-to-day:

• Examples include rent, utilities, office supplies, and employee wages.
• They are recorded on your income statement.
• Expenses reduce your profits immediately, affecting your net income for the period.

Liabilities are amounts your business owes to others that will be settled in the future:

• Examples include loans, unpaid supplier invoices, taxes payable, and accrued salaries.
• They are recorded on your balance sheet.
• Liabilities represent future payment obligations rather than immediate reductions in profit.

Understanding the distinction between liabilities and expenses is crucial for:

• Managing cash flow: Know what you need to pay now versus later.
• Planning finances: Forecast your short-term obligations versus operational costs.
• Financial reporting: Keep accurate records for accounting and tax compliance.

Valuing your business – seeing what it's worth

You can calculate your business value using this fundamental accounting equation:

Assets - Liabilities = Owner's Equity

What this means:

• positive equity: your business has value (assets exceed liabilities)
• negative equity: your business needs attention (liabilities exceed assets)
• zero equity: your business breaks even but has no value

This calculation shows your true business worth and financial health.

Owner's equity is the business's net worth. Knowing your net worth can be important if you are applying for a loan or looking for investors. They will want to know how your business is doing and if it's financially viable.

Accounting for your assets and liabilities

Both your assets and liabilities go on your business' balance sheet. As the balance sheet uses the double-entry bookkeeping system, both sides of the balance sheet must appear equal. The balance sheet provides you with a summary of your business.

In accounting, every entry has a debit and a credit. If the two sides do not match, you need to find and fix the error.

Common errors preventing a balance sheet from balancing can include:

• duplicate entries
• incorrect dates
• forgetting a transaction
• putting the wrong inventory numbers or values

These errors will be in your accounting ledger. Your bookkeeper will need to check your records so you can balance your books. For compliance, you must keep records for at least six years from the end of the last tax year they relate to.

The balance sheet is one of the three main financial statements you use to see your business’s financial health. It gives you a snapshot of your assets, liabilities and equity so you can see your current financial position.

Reviewing your balance sheets

Review your balance sheet and other financial statements regularly with a professional. An accountant can help you understand your business’s financial health and plan your future operations and projects. They play a key role in your financial planning.

Xero accounting software helps you produce your balance sheet, income statement and profit and loss statement quickly and easily. Automation reduces errors, which is helpful if you are audited.

Simplify your financial tracking with Xero

Keeping track of your assets and liabilities doesn't have to be complicated. With the right tools, you can get a clear, real-time view of your business's financial health.

This helps you make smarter decisions, stay on top of your obligations, and focus on growth. Try Xero for free and see how easy it is to track your finances.

FAQs on assets and liabilities

Here are answers to some common questions about assets and liabilities.

What's assets minus liabilities?

When you subtract your liabilities from your assets, you get your equity or net worth. This shows how much of your business’s value belongs to you after paying all debts.

Is cash an asset or liability?

Cash is always considered an asset. It's the most liquid asset a business can have, meaning it's readily available to pay for expenses, debts, or investments.

How do I know if something is an asset or liability?

Ask yourself two simple questions. Does the business own it, and can it provide future economic value? If yes, it's likely an asset. Does the business owe it to someone else? If yes, it's a liability. Assets add value to your business, while liabilities are obligations you need to settle.