Many people can’t tell the difference between assets and liability. Most people confuse liability to assets, hence, they end up acquiring liabilities instead of assets. And this is the reason why most people struggle financially. While the rich are acquiring assets, the poor and middle class who are less enlightened are acquiring liabilities, with the false believe that they’re acquiring assets.
As quoted by Robert Kiyosaki in the book “Rich dad, Poor dad,” if you want to be rich, you must know the difference between an asset and liability, and you must buy assets. This may sound absurdly simple, but most people have no idea how profound this rule is. Most people struggle financially because they do not know the difference between an asset and a liability. “Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.
As an individual or company, you’re bound to suffer financial if you can’t tell the difference between these two terms. According to Kiyosaki, the number one rule of becoming financially free is to know the difference between asset and liability, and strive to buy assets. If you don’t know the difference between these terms, you might end up accumulating liabilities, with false believe that you’re buying assets. Anyone who desires to be financially free must first know the difference between assets and liability.
After reading this article, I bet you’ll know the difference between these terms and why you must strive so hard not to acquire liabilities – why you must try as much as possible to buy assets only.
What is asset?
An asset is something that you own, that is valuable. In other words, it is anything that has positive economic value. Asset is something that is worth money – anything a person or company can exchange for money. Asset provides a future economic benefit. Assets are those things that put money into your pocket.
For example, If you own a house (not on loan), that’s an asset, because you’ll get a positive amount after selling it. But if you buy a house on loan and keep it as mortgage, it is a liability (but an asset to your lender).
Furthermore, an asset can be defined as the economic value of anything owned by a person or company. Simply put, they are those objects that can be converted to cash, or that generates income for a person or company. With assets, a person or company can pay his/its debts.
- If you own a house that generates rental income, that’s an asset.
- Your dividend paying stocks investments or mutual funds are your assets.
- Your real estate property is an asset
- Your inventory or goods
- Your investments, and so forth.
Types of Asset
Asset is divided into two: Current assets and non-current assets.
- Prepaid Expenses
- Account Receivable
- Long term Investments
- Tangible Fixed Assets – These are assets that we can see and touch, e.g. goods, land, buildings, and so forth.
- .Intangible Fixed Assets – These are assets that we cannot see or touched, e.g. patents, trademarks, goodwill, copy right, and stock.
What is Liability?
Liabilities are what you owe to others. In other words, they are debts which a person or company owes to a person or entity. They are financial obligations that has to be paid off in the near future.
Liability can be defined as the economic value of any debt or obligation a company owe to an organization or individual. Simply put, liabilities are responsibilities arising from past transactions – that has to be paid off by the person or company in a short period of time – through the assets owned by the person or entity.
- The money you owe is a liability
- Bank loans
- Long term borrowings
- Children’s education, and so forth.
Types of liabilities
Liabilities are divided into two: Current liabilities and Non-current liabilities.
- Account Payable
- Outstanding expenses
- Short term loan
- Bank overdraft
- Long term loans
Major differences between Asset and Liability
- Assets are something that a company owns that will give future benefits, while liabilities are something a company owes, and must be paid off in the near future.
- In the balance sheet, assets are shown on the right side, while liabilities are always on the left side.
- Assets are divided into current and non-current assets, while liabilities are classified as current and non-current liabilities.
- Examples of assets are: Investments, goods or inventory, building, patent, trade receivables, trademarks, etc. while examples of liabilities are: trade payable, bank loan, overdraft, debentures, etc.
- Assets are financial resources that provides economic benefits. On the other hand, liabilities are those financial obligations that needs to be paid.
- Assets are depreciable objects (i.e. a certain amount or percentage is deducted annually). Whereas, liabilities are non-depreciable objects.
- Assets are properties that can be converted into cash in the future. On the other hand, liabilities are debts that must be settled in the near future.
An asset is something that you OWN while a liability is something that you OWE. If a person or company is financially successful, it means that he/it has more assets than liabilities. They have reliable means to settle their financial obligations. On the other hand, any person or company that has more liabilities than assets is in a dire financial trouble.
If you wish to be financially free, ensure that your liabilities don’t exceed your assets. Strive to acquire assets instead of liabilities. Most people do otherwise because they can’t tell the difference between them. The more assets you have the wealthier you become, the more liabilities you have the poorer you become.