Understanding Heritage: Assets, Liabilities, and Equity
Understanding Heritage in Accounting
Definition of Heritage: A set of economic assets, tangible or intangible, coordinated to an end and owned or controlled by an operator, including any burdens on it.
Grouping of Heritage
Assets: Elements that the company uses to develop its core business or complementary activities. These may be used in the production process or acquired/manufactured for sale.
Rights: Elements that determine the company’s legal status, allowing it to demand the implementation of commitments from third parties.
Debts (Liabilities): Commitments to third parties acquired through business activities. These must be satisfied with returns from assets and rights.
Heritage is discussed in accounting from two perspectives:
- Economic Structure (Assets): Goods, rights, and other resources available to the contractor for activity performance.
- Financial Structure: The source of funds or funding needed to acquire the assets (Equity and Liabilities).
Economic Masses
Mass: A clustering of property assets with a financial or economic function. Equity items are components of heritage. We distinguish the following three economic masses:
- Assets: Property, rights, and other economic resources controlled by the company resulting from past events, expected to generate profits or future economic performance.
- Liabilities: Current obligations arising from past events, where the company expects an outflow of resources that can produce profits or future economic performance.
- Equity: The residual interest in the assets after deducting all liabilities. External inputs are made by the employer to the company and retained earnings.
Correlated Assets and Equity Balance
Masses are correlated assets that pair masses at the same level, one part of the economic structure and the other belonging to the lender.
Total balance refers to the entire estate, comprising all Assets, Liabilities, or Equity. From an accounting perspective, a company’s assets will always be in total balance due to the quantitative performance of double-entry bookkeeping (Assets = Liabilities + Equity), regardless of economic balance or imbalance.
Partial Equilibria
Masses refer to economic correlatives. Partial equilibrium exists when the amount of the economic structure mass is greater than or equal to the amount of the financial structure mass. Otherwise, there is partial imbalance.
Financial Positions and Stability
- Position of Maximum Stability: Assets = Equity, Liabilities = 0. Assets are fully financed by own means. This position exists at the start of every business.
- Stable or Normal Position: Assets = Liabilities + Equity; Assets > 0, Liabilities > 0, Equity > 0. This equality represents a normal position. Quantitative stability does not guarantee economic stability.
- Equivocal Position: Assets = Liabilities, Equity = 0. All assets are financed by debt; the proprietor or partner owns none of the heritage. This occurs when the employer or partners withdraw contributions or the company has losses that reduce equity.
- Unstable or Abnormal Position: Assets + Equity = Liabilities; Equity < 0. A portion of the asset is worthless. The value of the company’s property and rights is less than its debts or liabilities.
- Location of Maximum Instability: Equity = Liabilities, Assets = 0. It is rare for a company to reach this situation. All active assets are worthless.