Assets vs. Liabilities

The first topic that students learn in economics is assets and liabilities. Asset - as defined by most of the books - is anything that increases value or equity, whereas a liability decreases value or equity. Often people fail to classify their assets and liabilities. This article intends to increase your understanding of assets and liabilities.

It’s very important to understand your assets and liabilities because most of the time we mistakenly look at our liabilities as assets, for eg., the house you live in is not an asset until and unless its mortgage has been fully paid or you’re getting money in form of rent from the house. A house comes with a huge pile of liabilities ranging from EMIs to electricity bills to maintenance which is often overlooked by a large chunk of people. Similarly, a car is a depreciating asset as its price goes down tremendously after you purchase it as second-hand cars are worth less than the actual price of the car and may lead to a huge loss.

As defined by Robert Kiyosaki, assets are something that puts money in your pocket whereas liabilities take money out of your pocket. An average person earns money in form of income and spends it on making payments for his expenses and this cycle of income and expenses continues which does not lead to the creation of any assets but leads to payments of liabilities. Whereas some people look at their assets as a ‘money-creating-machine’, if they have a house- they’ll rent it, they invest in stocks, mutual funds, and bonds, they run businesses that don’t stop even while they’re asleep, etc.

Now, assets are of two types: tangible and intangible. Tangible assets are assets that you can touch and see, meaning they are physical, e.g., land, equipment, cash, inventory, etc. Intangible assets aren’t physical, e.g., brands, business patents, etc. One of the intangible assets is knowledge, if you have the knowledge you act as an asset for the organization you work for. E.g. a teacher is an asset to a school because she has knowledge which she imparts to students. Better the teachers, the more students will be enrolled in the school and the school management will make more profit.

An overlooked variable of assets and liabilities is time. Time can change what you think of as an asset to liability. E.g. you purchase stocks in a few companies thinking you’ll get more than you invested in the future, but the companies lose their value and trust in the market, now your stocks are worth less than you purchased them for and you are in a state of loss. Thus time plays a very important role. So, whenever you are investing in something which you consider to be an asset to you remember to think about the future aspects of the product.

With so many changes happening around the globe, it’s at times difficult to assess what may or may not be an asset in the future. Therefore one must always invest very cautiously. The goal should always be to acquire more assets and fewer liabilities.