What are Assets and Liabilities? SMEs & Contractor’s Guide

Understanding assets and liabilities is essential for managing your business’s finances and making informed decisions. Whether you’re a small business owner, contractor, or freelancer, these two elements form the foundation of your balance sheet and reveal your company’s true financial health.

In this guide, we’ll explain:

• What assets and liabilities are
• Where they appear on financial statements
• The role of equity in company value
• Examples of assets and liabilities
• Categories like current vs non-current liabilities and current vs fixed assets
• The growing importance of non-physical (intangible) assets
• A sample balance sheet for SMEs
• Why this matters for small business owners and contractors

What Are Assets and Liabilities?

At their simplest:

• Assets are resources your business owns or controls that provide future economic benefit.
• Liabilities are obligations your business owes to others.

For example, a carpenter’s tools, van, and cash in the bank are assets. The loan used to buy that van or unpaid supplier invoices are liabilities. According to the Corporate Finance Institute, assets and liabilities are two sides of the same coin — together, they determine equity, or your net worth.

For SMEs and contractors, the distinction matters because:

• It shows if you’re building wealth or only covering debt.
• It impacts your ability to borrow or attract investors.
• It shapes long-term growth and tax implications.

Think of assets as your fuel tank, liabilities as the debt on your fuel card, and equity as what’s left after paying the balance.

For a deeper dive into this topic, see our guide on What is a Balance Sheet: 2025 Small Business Guide.

Where Assets Appear on the Balance Sheet

Assets usually appear on the left-hand side or top section of a balance sheet, listed by liquidity (how quickly they can be converted into cash).

According to QuickBooks, assets fall into two main categories:

• Current assets: Cash, accounts receivable, prepaid expenses, and inventory—items expected to convert to cash within 12 months. They support working capital and day-to-day operations.
• Fixed (non-current) assets: Property, plant, and equipment (PPE), long-term investments, and intellectual property. These aren’t easily converted into cash but are vital for producing goods or services.

Example for contractors:

• A plumber’s current assets might include unpaid customer invoices and cash on hand.
• Fixed assets could include a work van, pipe-cutting tools, and warehouse leasehold improvements.

Where Liabilities Appear on the Balance Sheet

Liabilities are listed on the right-hand side or lower half of the balance sheet, ordered by due date.

• Current liabilities: Obligations due within 12 months, such as payroll, supplier invoices, and taxes payable.
• Non-current liabilities: Long-term obligations like mortgages, multi-year equipment loans, or pension commitments.

Patriot stresses the importance of monitoring these categories for cash flow. Too many short-term liabilities without enough current assets signals risk.

Example for contractors:

• Current: Fuel bills, supplier credit, employee wages.
• Long-term: A 5-year equipment loan or business mortgage.

Equity: What Is Your Company Worth?

Equity represents what’s left after subtracting liabilities from assets: Assets – Liabilities = Equity

According to Investopedia, equity reflects ownership value. For sole proprietors and contractors, it’s owner’s equity. For corporations, it’s stockholders’ equity.

Example:

• Assets = $100,000
• Liabilities = $40,000
• Equity = $60,000

This bottom line is your company’s true net worth. Lenders and investors look at equity to assess stability before approving funding.

Examples of Assets vs Liabilities

Example 1: Small Retail Shop

• Assets: Cash in till ($1,200), inventory ($10,000), store fixtures ($5,000)
• Liabilities: Rent due ($1,500), supplier invoices ($3,500), credit card debt ($2,000)

Example 2: Independent Contractor (Electrician)

• Assets: Van ($15,000), tools ($4,000), unpaid client invoices ($3,500)
• Liabilities: Equipment lease ($2,500), tax owed ($1,200), fuel card ($800)

Example 3: Construction Company

• Assets: Heavy machinery ($100,000), company trucks ($40,000), land ($200,000)
• Liabilities: Bank loan ($120,000), payroll obligations ($15,000), supplier credit ($8,000)

Assets vs Liabilities: What’s the Difference?

The core difference between assets and liabilities is that assets generate value, while liabilities create obligations. SMEs must categorise them accurately to produce financial statements.

Examples of Liabilities

Current vs. Non-Current Liabilities

• Current: Due within 12 months (accounts payable, short-term loans, taxes payable).
• Non-current: Due after 12 months (mortgages, bonds payable, long-term leases).

Examples of Assets

Current Assets

Cash, accounts receivable, inventory, prepaid expenses.

Fixed Assets

Buildings, vehicles, property, plant, and equipment.

Financial Assets

Investments, retirement accounts, treasury stock.

Intangible Assets

Trademarks, patents, goodwill, brand value, software IP.

Learn more in our article on What is Accrual Basis Accounting?

How Do I Know If Something Is a Liability?

A useful test:

• If it provides future economic benefit → Asset.
• If it requires future repayment or service → Liability.

Examples:

• A customer invoice due to you = Asset.
• A supplier invoice you must pay = Liability.
• A leased van = Liability (payments), but if owned, the van itself = Asset.

How Are Current Liabilities Different From Long-Term Non-Current Ones?

• Current liabilities like supplier bills and wages impact liquidity and must be settled quickly.
• Long-term liabilities like a 10-year mortgage give breathing room but affect creditworthiness and long-term planning.

How Are Current Assets Different From Fixed or Noncurrent Assets?

• Current liabilities like supplier bills and wages impact liquidity and must be settled quickly. They typically represent short-term financial obligations such as credit cards, payroll taxes, or accrued expenses. These items show how much cash a business needs to have on hand to cover immediate commitments.
• Long-term liabilities like a 10-year mortgage or multi-year equipment loan give breathing room but affect creditworthiness and long-term planning. They are considered long term debt and usually fund significant purchases such as property, plant, and equipment or real estate investments.

Understanding the split helps contractors manage working capital more effectively. If current liabilities consistently exceed short term assets and cash and cash equivalents, it can indicate liquidity problems. 

On the other hand, healthy long-term financing allows businesses to grow strategically while balancing debt against future income streams.

If you’re finding it hard to remember, think of this analogy: Current assets are like cash in your wallet; fixed assets are like your house — you can’t sell it instantly to cover short-term expenses.

What Are Non-Physical Assets?

Intangible assets like trademarks, patents, copyrights, or proprietary software are increasingly valuable in modern business. They do not have physical form but can deliver measurable economic benefit. 

For example, a contractor’s customer database, a small retailer’s brand reputation, or a startup’s software license can become critical drivers of equity and long-term growth.

Non-physical assets also include intellectual property, goodwill from acquisitions, and digital assets like domain names or proprietary code. These may not appear as prominently on balance sheets, but they add to net assets and owner’s equity.

According to CFI, non-physical assets are often undervalued but play a growing role in total company worth. Many small business owners overlook them when preparing financial statements or presenting to investors. 

Balance Sheet Example for SMEs

Here’s a simplified example:

Assets

• Current: Cash $8,000; receivables $5,000; inventory $3,000
• Fixed: Van $12,000; equipment $10,000
• Intangible: Trademark $2,000
  Total Assets: $40,000

Liabilities

• Current: Supplier bills $4,000; tax due $2,000
• Non-Current: Bank loan $10,000
  Total Liabilities: $16,000

Equity: $24,000

This table shows how assets and liabilities work together to reveal net assets and owner’s equity.

For more on financial documents, read our guide on What Is a Profit & Loss (P&L) Statement?

Why Understanding Assets and Liabilities Helps Contractors

For SMEs and contractors, knowing the difference between assets and liabilities is crucial:

• Improves cash flow planning and working capital.
• Strengthens borrowing terms by showing strong equity.
• Informs smarter pricing for goods or services.
• Simplifies reporting during each accounting period.
• Guides reinvestment, savings, or borrowing strategies.

For additional insights into cash movement, check out How To Create a Cash Flow Projection: The Ultimate Guide and What Is Cash Flow Formula and How to Calculate It?

Manage Your Finances Smarter

Need an invoicing solution to stay on top of assets and liabilities? Try Invoice Fly’s Invoice Maker — it’s free, fast, and built for small business owners.

Assets and liabilities form the backbone of your financial statements. Get clear on them, and you’ll better understand whether your company is profitable or just staying afloat. They shape equity, influence lenders, and guide your growth strategy.

For a deeper dive into managing business finances, learn how to create financial projections.