Assets vs. Liabilities

 

On reading the title you must be surprised, why am I writing about such a basic thing, but don’t worry, I will present both these terms in a different perspective.

Traditionally “Asset” means property, land, building, furniture, vehicles and it also includes intangible assets like goodwill, patents etc. i.e anything on which the person has “Rights” and can execute his/her will for using, destroying or selling the same. You will find all such assets on the asset side of the balance sheet.

Liabilities are the financial obligations that are to be honored at pre-decided time or sometime.

If we look at the assets and liabilities with different lenses, we will be surprised to find how many assets we hold, actually are liabilities. Liabilities are invariably the same and don’t need explanation, one must be aware of the compounding effect on our liabilities as well.

Robert Kiyosaki in his book “Rich Dad Poor Dad” has given a fantastic definition of assets and liabilities. He says all those things which generates positive cash flows should be classified as assets and all those things which gives you negative cash flows should be classified as liabilities.

Let us look at some traditionally known assets and its ability to generate positive cash flows. For ex. House in which we stay, Cars that we use – every balance sheet will show these as assets, but does it really generate positive cash flow or it actually draws financial resources, give it a thought. There is room for argument, i.e should we stop owning such assets, the point is not about owning or not owning such assets which draws financial resources, the point is about knowing proper classification and using the same for informed decision making as well as getting out of the imaginary world. The investment in any form which either grows in value or earns you periodic income or both is asset. How many of such assets do you own, need to identified.

No accountant will ever agree to classify assets on the above test, but this is necessary to achieve financial freedom. Morgan Housel in his book titled “The Psychology of Money” say’s “Wealth is all those things you can buy but you did not buy”. There is no problem in flaunting costly luxurious brands to show off the wealth, but the same thing actually reduces your wealth and the impact is severe if that thing is a depreciable asset. Just think about it.

CA. Avinash Shukla

Email: caaashukla@gmail.com

Mo: 9890184190

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