I used to misunderstand the difference between assets and liabilities thinking that all expensive items are assets.
It took me some good level of financial education before i discovered the major difference between assets and liabilities.
It’s true that the environment people live in has capacity to influence their thought realms.
However, we mustn’t allow our circumstances and environments to define our thinking level and believe systems.
If you read books from Robert Kiyosaki, Napoleon Hills and other finance authors, you would learn a lot about assets and liabilities.
Some people think their expensive car is an asset, others even believe their expensive house is also an asset.
Only a good level of financial education will help you understand the difference between assets and liabilities.
Therefore, through this article, you will understand what an asset and liability means and know the difference between them.
Table of Contents
What is an Asset?
According to Robert Kiyosaki, an asset is anything that puts money into your pocket, it puts money in your account.
Assets are valuable resources, useful and important to individuals, businesses, corporations and governments.
That is, it has capacity to generate cash flow, reduce expenses and set you up on profits.
An asset is anything that has value and has capacity to create wealth to its owners.
Hence, it could be a business that generates you money consistently, it could be gold, oil or any valuable resources.
To most companies, assets are machinery and represents the life-wire of their production.
In the most simply term, an asset is anything that generates money continuously for you.
Therefore, assets are items owned by a business or a company. However, liabilities are things the business or company owes.
What is asset in accounting?
In accounting assets could be seen in another perspective, it could be seen as current and non-current assets.
Currents assets are stocks in trade, prepared liabilities, deposits, readily marketable securities, cash and it financial equivalents.
Non-current assets are therefore classified into properties, plants, equipment’s and machinery’s, intangible assets and long term lease obligations,
They are also derivative assets, deferred tax assets and investments in subsidiary e.t.c
Types of assets:
Lets checkout the two types of assets below.
- Current Assets.
- Non-Current Assets or Fixed assets.
1. What are current assets:
These are assets used in the daily running of a business or company which are usually consumed within one year.
They include cash, account receivable, liquid assets, stock inventories, marketable products and services.
Hence the name current assets, they are classified into the current business account.
2. What are non-current or fixed asset:
These are the long term investment a company or an individual engages in that is not expected to manifest in one year.
Examples are properties, plant and equipment, patent rights, intellectual properties, long term investment and business missions.
All multi-national company today build non current assets that brings out the companies long term goal.
Therefore, non-current assets are not recorded in the current accounting year.
How to build assets in 13 powerful ways:
Lets look at powerful ways to build assets that differentiate between the rich and the poor.
1. Start building asset from your mind:
Every man is a product of what he thinks, what you think is what you become.
Therefore, if you think you can’t build assets then you would never be able to do it.
You need to develop a creative mind, a positive thought and a possibility mentality.
It all starts from your mind, the mind is the warehouse of creativity.
There are some 3 psychological business disciplines every entrepreneurs and CEO’s must have today you must find out.
Every great thing you see today originated from someones mind, your computers, phones, houses, cars or even your business.
2. Create a network for passive income:
Most wealthy people in our world today are wealthy because they build a network that pays them passive income.
What is passive income:
It’s an income that doesn’t require your active engagement in an activity before you earn money.
It’s a type of income that earns you money in your absence with little or no effort from you.
In network marketing businesses, passive income gives you a percentage income share from a certain population.
This is a system of earning money from a network that doesn’t require your presence before you earn.
In other words, you also earn money in commission when other people earn money.
To understand how passive income works, i advice you join a network marketing company.
Hence, you can know how to become a network marketing professional to enjoy earning passive income from now.
3. Save money (money saved can acquire an asset):
Saving money is one of the most difficult thing for people to do in our world today.
The urge of visiting a beach, going on vocations, living in an expensive house, riding the latest cars is demanding.
Also, the desires of putting on expensive cloths and jewelry can pull a person off saving completely.
Nevertheless, if you can save up money over a period of time it could be used to acquire a good asset that will bring you good returns in the future.
Here are 7 most powerful ways to save money without a bank you must know for free.
Saving money is one of the most important steps to build asset, you need to be discipline with your money .
Hence, ensure to put some money away immediately you get that paycheck or get paid for any business transactions.
Therefore, you can acquire an asset with your saved cash over a specific period of time.
4. Spend less than you earn:
You can never be rich or build wealth if you spend all you earn.
The problem now is that some people don’t just spend all they earn, they spend more than they earn.
Many people in our world today borrow to impress others and this leads them to huge debt and money crises.
If you ever desire to build assets, you must spend less than you earn.
For instance, you earn $1000 weekly making it $4000 a month, i advice you don’t spend more than $3000 per-month.
5. Always have a budget:
Earning money without a budget is a financial trap you must avoid, rich people know this but poor people don’t.
Most people who complain of lack today are the major causes of their lack because they have no budget.
Earning money without a spending budget will open you to extravagant and uncontrolled spending.
Having zero budget makes you spend money on things you don’t need.
Furthermore, you’ll end up borrowing to buy the things you actually needed.
A budget help will you curb your appetite and acquire enough money with which you can now build your assets.
Therefore, having a budget will help you foresee the things which are most important to you.
6. Lower your expenses:
If you must build assets then you must cut down on your expenses.
It could be cutting down on your electricity bills, water bills or even your regular shopping bills.
This includes dropping your taste for luxuries for a while till you build assets that can pay for them.
ALSO READ THESE ARTICLES:
7. Avoid bad debts especially credit card debts if possible:
It’s good you know that debts could really be a burden when it’s time to pay back.
Bad debt is borrowing money to spend on stuffs that doesnt return the money back to you
For example, borrowing for a night club, party, vocation or shopping. Avoid bad debts if you want to build assets.
There are good debts and bad debts, use good debt if you must but avoid bad debts.Robert Kiyosaki, Author of best selling finance book, RichDad PoorDad
8. Increase your income channel:
Get a side hustle or start a business, you can start an online business to increase your income at ease.
One of the most easy and fast growing online business i recommend is for you to start a blog.
I have described the 12 most amazing steps to become a successful blogger in this guide.
Also, don’t venture into blogging without knowing the 31 dangerous blogging mistakes to avoid like a plague.
9. Work more hours:
Every successful entrepreneur or CEO today works more hours than normal employees.
However they earn more money than any employee in the world.
Building assets would require lots of sacrifice from you.
Therefore be ready to work for an extra 2, 3 or 4 hour per day till you achieve your vision.
10. Get financial education:
No one can truly build assets without a good sense of financial education.
Read books, attend seminars and conferences, get a mentor who understands how to build assets and model his ways.
Therefore, if you really want to build assets or become rich then you need good financial education.
A good recommendable financial expert in our world today is Robert Kiyosaki, best selling author of Rich-Dad Poor-Dad.
11. Invest in the stock market:
Investing in the stock market requires you to study and understand how the stock market works.
Its an open market where regular exchange of buying an selling takes place.
Here, you can easily buy shared from publicly-held companies. You gain profits when price go up and lose if otherwise.
Therefore, take caution when dealing on stock market because a company stock price might be up today and down tomorrow.
Check for companies you can buy shares with high potentials for growth and invest according to your discretion.
The leading U.S. stock exchanges includes New York Stock Exchange (NYSE), Nasdaq and Chicago Board Options Exchange.
12. Buy a real estate property (consult a real estate professional):
This type of asset acquisition is not for the small players.
You require training in real estate management to do this.
It takes a good level of real estate knowledge to invest and buy a profitable real estate property.
Nevertheless, you can seek for the guidance of real estate companies to get a good real estate professional.
13. Buy shares in companies with consistent growth potentials:
Most successful entrepreneurs in our world today invest in new companies with potentials for growth.
Imagine buying 1% of Tesla or 1% of Amazon 20 years ago, you would be a multi-billionaire today.
Wealthy people look for potentials to build assets whereas poor people look for paycheck opportunities.
What is asset management?
Asset management is a service offered by a professional body which controls investments and properties for its clients.
It’s a professional term used to describe the process of managing assets for individual or companies.
This covers the development, operation, control and maintenance of assets in a cost-utilized manner.
Therefore, it’s a practice of managing assets to ensure maximum productivity and output.
10 Reliable Ways to Control your Asset:
- Avoid waste at all cost.
- Set up businesses to increase your income column.
- Don’t work for money, Let money work for you.
- Time is money, use time to build your assets instead of working for a boss.
- Avoid Bad debts.
- Live at your means.
- Invest your money.
- Lock funds for future investments.
- Buy cheaper assets with future growth potentials.
- Accumulate more valuable assets.
We have talked so much about assets, now we understand what an asset is all about, lets discuss about liabilities.
What are Liabilities?
Liabilities are direct opposite of assets, liabilities take money away from your pocket.
Let say you have a car, easy and going, it moves you around town in a smooth ride, that’s great.
However, if it does nothing to put money into your account then that car is a liability
Why did i just say that, okay listen let me explain to you.
You will spend money fueling the car, you will spend on maintenance and possible repairs when it breaks down.
What about a big house with flowers around it, beautiful and attractive yet you keep spending money on yearly maintenance.
You need to fix broken pipes, paint the walls, change the furniture and repair your car when it knocks down.
Nevertheless, these are liabilities that gives comfort to the owners.
Anything that takes money away from you whether it be for comfort or pleasure is not better than a liability.
Types of Liabilities:
Liabilities can be broken down into 2 basic categories below:
- Current Liabilities.
- Non-Current Liabilities.
Current Liabilities (Short term liabilities):
These are monetary obligation a company or an individual has to pay within a period of time.
They might be within a year or fall into daily or monthly operational expenses.
Hence, they are taxes, dividend payable, payroll liabilities, accrued expenses and unearned revenues could be regarded as current liabilities.
Non-Current Liability (Long term liabilities):
These are liabilities that are not expected to come up withing a short period of time.
They are long term liabilities with that are usually handled over one year duration period.
they could be long term loans, obligation to pay for a lease property and
Examples of assets and liabilities (Major difference between assets and liabilities):
There are many examples of assets and liabilities, but let’s quickly analyse some major examples of assets and liabilities today.
Examples of assets:
It could be your undeveloped lands or those you build your real estate properties or companies on.
Above all, lands are one of the most valuable assets today, its value keeps appreciating in-spite of global inflation.
Machines which are used for production and constructions are good example of assets.
Most of those machines could be used for 10, 20 or 30 years, they are used productively and generate huge cash returns for their owners.
The good thing is that they have high second hand value and could be sold at a very good amount if its at good condition during sales.
3. Good name or reputation:
Most big business owners today will never trade away their good reputation and good will for anything.
Good-will counts as assets. Coca-cola has a good reputation in the soft-drink market.
Therefore, companies will do everything legitimately possible to protect their good name and reputation.
4. Accounts receivable:
Account receivables are money a company is entitled to receive from a customer for a service or product already delivered.
These could be in a few days or month from the days of service or product delivery.
Therefore, any cash you are entitled to receive can be seen and recorded as your account receivables.
Examples of Liabilities:
1. Account payable:
Accounts payable are short-term debts or obligations a company or an individual is expected to pay.
For instance, if a bottle water company owes money to it’s plastic suppliers, those items are part of the inventory, and thus part of its trade payables accounts.
A sum of money or valuables an individual or company borrows from another individual with conditions and agreement to repay with interest over a particular period of time.
The pay back period depends on terms of the loan, it could be in months or years depending on agreement.
Payroll are liabilities to a company because they take money away from a companies account.
It’s a list of employees who are entitles to receive salaries or wages with amount due to each person.
Hence, it is the total sum of money paid to a company’s employees list.
Nevertheless these are liabilities that are indispensable to a company because workers must get paid for their service rendered.
How to Avoid Liabilities in 5 simple ways:
Let’s quickly check out 5 simple and effective ways to avoid liabilities.
- Live at your means: Buy the things you can comfortable afford per time.
- Stop trying to impress people: Nobody care about your new shoes or cars, nevertheless am not implying that you shouldn’t buy one if you can conveniently afford it.
- Choose wise companies: Associate with people who carry a wealth creation mentality with proven assets.
- Have a financial and business mentor: Have a mentor who gives you advice and insight on how to avoid liabilities and create profitable assets.
- Keep up profitable investments: Keeping profitable investments will help you control the urge to spend money on undisciplined and unprofitable assets.
You Should Also Read These:
How to turn liabilities to assets in 3 easy ways:
Lets examine 3 amazing ways to convert liabilities to assets
- Sell off the liabilities you bought and use them to start a business.
- Lease out rent-able liabilities to generate an extra income.
- Use liabilities capable of offering services to offer services to people in return for a pay.
Now you know the difference between assets and liabilities, am sure you’ll start making good financial decisions.
Though there are liabilities we can’t ignore, such as house rent or maintenance, car repairs or even repayment of loans.
Nevertheless, a good level of financial education will help us avoid more liabilities and grow more wealth by building assets.
Kindly share this article and let me know if you got value from this article at the comment session.
Also ensure to subscribe using the subscription form below to stay updated to latest business updates from business finger.