Basic Personal Finance : Assets Vs. Liabilities

Priyanka Verma Verma Author

Jun 24, 2022 |

A clear and simple explanation of Assets and Liabilities. And their role in a persons Financial wellbeing and Wealth Creation.

"You must know the difference between an Asset and a Liability and buy Assets. Rich people acquire Assets. The poor and middle-class acquire Liabilities that they think are Assets".

-Robert Kiyosaki

One of the most important Financial Statements of a business entity is it’s Balance Sheet. For the accounting point of view Assets and Liabilities are the two categories in which broadly a balance sheet of a company or any other business entity is divided, which tells about the financial standing of the organisation.

So we can say that a Balance Sheet is a clear picture of an organisation’s Financial position at a particular time.

But, What is it’s role with respect to an individual ?

Assets and Liabilities plays very crucial role in a person’s life. To understand the importance of Assets and Liabilities in a person’s life ,we first need to understand clearly:

What an Asset is ?

& What a Liability is ?

Asset : With respect to a business entity Assets are the items which a company owns & are a company’s resources to generate cash in future. Also add value to the company.

Same is true for the individuals also.

“Assets are those items or possessions Which a person owns & put cash in his pocket, whether he is working or not.”

Assets are those resources which do not need your physical presence to generate income. These are passive source of income.

Means Assets increases a person’s earning capacity i.e. add value to your regular income. And If you reinvest this income, generated by your Asset column, you will keep on increasing your passive income source.

Broadly with respect to a person, Assets are of 3 types:

1. Short Term Assets: Are those items which are going to be realised in cash within a period of one year. In simple words we can say, Investments which are going to be matured within 12 Months are Short term Assets.

Example : FDs and RDs for maximum 12 months period, All insurance schemes going to be matured within a year, Any loan given to relatives or friends for a short periods etc.

2. Long Term Assets: All the investments made with a long term point of view i.e. for 5 years, 10 years or more are long term assets.

These are all those possessions which are going to be realised any time after 12 months period. Most of such possessions are good source of periodic passive cash flow.

A person who is serious to create wealth in his life always build Long term Assets, backed up by a strong Goal, supported by a strong ‘Why’.

Example: PPF, Other Annuity schemes, Insurance plans, ULIPs etc.

3. Marketable Assets: Are all those possessions which a person can convert into cash by selling them in the market Whenever needed.

Example: Mutual Funds, Stocks, Bonds, CDs, Real estate, Gold etc.

Liabilities : Liabilities are all those items which a company owes to the other parties. These are a company’s obligations which a company has to pay in cash or otherwise in future. Liabilities decreases value to the company.

With respect to the person, 

“Liabilities are all those items or belongings which takes out cash from your pocket”.

Liabilities are those cash outflows, which we are bound to do because we owes money to someone or we owns certain items or luxuries in our life which have high maintenance cost.

These luxuries necessarily don’t impact our livings too much.

Simply we can say the liabilities are all those items which a person owes to someone & need to pay in cash or otherwise within a decided time period.

Liabilities can be divided into 2 categories:

1. Short Term Liabilities: Are those obligations which are due to be paid within a period of one year. These takes out cash out of the pocket immediately and impacts our wealth creation Goal very badly.

Example: Credit card bills, Consumer Loans, Medical bills, Loans for short terms etc.

2. Long Term Liabilities: Are those obligations which are due to be paid after one year period.

These are all long term loans to be repaid within 5 years, 10 years or more.

Example: Home loan, Car loan, Education loan, Personal loan etc.

Conclusion: Now you better understand Assets and Liabilities. So A person who wants to create wealth and wants to strengthen his Financial wellbeing needs to focus on building Assets in his life and Plan to reduce and ultimately eliminate Liabilities completely. When Assets column starts generating sufficient cash to support your luxuries enjoy them. But always keep in mind to increase your Assets as these are the income sources without your physical presence.

Categories: : Basicpersonalfinance