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Difference Between Assets And Liabilities

Difference Between Assets And Liabilities

Difference Between Assets And Liabilities

In this article, I am going to focus on the very interesting and must know topic related to finance.

The reason behind this is, most of the people in India exactly do not know the difference between Asset and Liability! And this is fact.

After reading one of my most favorite book "RICH DAD POOR DAD" by most famous author named Robert Kiyosaki, I exactly came to know about the difference between this two terms.

Whenever I discussed about Asset and Liability with my friends, clients, neighbors, elders or even professionals like doctors, engineers, advocates etc. I came to know that their is a biggest misconception in the mind of people that "I have an Asset of 50 Lacs or 1 Crore!"

I use to ask them, What is it?

Their reply use to be, "My Home!"

Here comes the very important point due to which I thought to write this article to clear the concept about what actually your Asset and Liability is.

Before considering anything as your Asset or Liability ask one question to yourself, "WHETHER THIS THING PUT MONEY IN MY POCKET FOR ME OR IT ASKS FOR THE MONEY FROM ME...???"

And after answering this question it will be completely clear in your mind whether it is your Asset or Liability!

ASSET

An asset is what you owns and helps put money in your pocket.

Example: Your house, shop, office or any property given on rent which gives you income every month, stocks and shares you hold, mutual fund units you hold, bonds, fixed deposits, cash reserve, bank balance etc. are your assets. 

The various types of assets are:
Fixed Assets: Assets which are acquired for the purpose of increasing profit earning capacity of the business and are purchased not for sale purpose, they will remain in the business till the business winds up. 

Example - Land and building, plant and machinery etc.
Current Assets: Assets which can be converted into cash within a short period say one year. These are short term assets for the purpose of converting them into cash. Example, cash in hand, debtors, stock, bank balance etc.
Liquid Assets: Similar to current assets, but they are those assets which can be easily and in a very short period of time can be converted into​ cash, so all current assets except stock and prepaid expenses are considered liquid assets.
Tangible Assets: Assets which having some physical existence or we say which can be touched and seen.

Example - Land and building, machinery, stock etc.
Intangible Assets: Assets which can't be seen or touched and there revenue generation is assumed to be uncertain. Moreover they can't be purchased or sold in open market.

Examples -Goodwill, patents, trademarks etc.
Fictitious Assets: Assets which do not have any real value and do not have any physical form but are called assets on the basis of legal and technical grounds, as they do not have any real value so they are written off in the future.

Examples - Preliminary expenses, discount on issue of shares and debentures etc.
Wasting Assets: Assets when with the passage of time value of assets decreases, Example - Patents, leasehold property.
LIABILITY

A liability is what you owes and takes money out of your pocket.

Example: Your house in which you live, bank loans, mortgage loan, child's education and marriage, monthly expense, cars, taxes etc. are all your liabilities.

The various types of liabilities are:

Fixed Liabilities: Liabilites which are payable after a long period or normally one year.
Examples - Long term loans, debentures etc.
Current Liabilities: Liabilities which are payable within one year. 
Examples - Bills payable, creditors etc.
Contingent Liabilities: Liabilities which are not a liability for today but it may be liability in future depending on the future events, they are uncertain liabilities so that is why they are called doubtful liabilities also. 
Examples - Value of bill discounted, cases pending in court etc.
So, now I hope that you have enough knowledge of identifying your assets and liabilities. 

Start building your assets to meet all your liabilities.

Don't buy luxuries until you've built the assets to afford them. - Robert Kiyosaki

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Very well explained! This article helped me alot clarify the main difference between asset and liability. Thank you so much Sir! (h)

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