If you want to be able to build sustainable wealth and increase your income, you have to know what exactly you’re spending on and what it means for your overall finances. When spending, it is easy to drop nomenclatures and just spend. What are the things you are spending recognized as? Are you spending on an asset, a liability, or neither?
In accounting, an asset is an economic resource. They are the things that are used to produce value. So they include things like your office space because it allows you make money or the machinery employed to produce things to sell. A liability on the other hand, is the future sacrifices of economic benefits that you are obliged to make to other entities as a result of past transactions or other past events. So they generally include your debts, accruals, and so on. Hence, the goal is to have more assets and less liabilities. Assets are your pros while liabilities are your cons. As clear as this definitions are, people still find it had to tell the difference.
The main difference between assets and liabilities is that assets provide a future economic benefit, while liabilities present a future obligation. Another difference is that you can easily convert an asset into cash within a period of time. So, asides the fact that your business motor vehicle helps you make money, it can also be sold to get cash. Also, current assets like inventory also means you can sell off your products and get cash. If it cannot be converted to cash, it is a liability. Another way to tell the difference is through depreciation.
Depreciation is simply the reduction in value of any asset. As you can already tell, assets are depreciable as they can reduce in value, while liabilities are non-depreciable. In fact, liabilities can increase in value making you spend more! A good example are loans. When you take loans, you have to pay money and if you don’t pay back on time, chances are that interest rates would increase. Assets cause you to make money over the years while liabilities cause you to lose money over the years.
The trick is being able to use your assets to offset your liabilities. You should have more money than financial obligations. A successful business is one that has more assets to liabilities. That is what you achieve balance and grow your overall wealth. In personal finance, however, you have to be clearer. Your motor vehicle is not an asset if it doesn’t help you make money. See your assets in terms of all things that have specific values and can be used to meet obligations like debts and overdrafts, and be sure to always track your finances.
BY: LAWRETTA EGBA