Difference between Assets and Liabilities

Difference between assets and liabilities: in accounting, Rich dad poor dad, with examples. If you are an accountant, then one main concept that you should have a grip on is what is the difference between assets and liabilities. Assets and Liabilities are two different terms but sometimes these terms create confusion and only one step will be left with you to prepare the balance sheet from the first step.

Difference between assets and liabilities: in accounting, Rich dad poor dad, with examples
Difference between assets and liabilities: in accounting, Rich dad poor dad, with examples

Assets can be defined as the items that are owned by someone who may be an owner of a company and these items are kept for the economic benefits. Whereas, liabilities are the items that you owe other parties. In short, you can extract a simple meaning from the above-mentioned definitions that assets put money in your pocket whereas liabilities take money out.

The difference between assets and liabilities is a heading that can be defined in different ways as it covers a range of explanations. Assets are owner’s items and they are used or invested by the owner in his own company to increase its equity.

The more your assets will outweigh your liabilities you will become stronger in the financial field of the business but if your liabilities are higher than your assets then you should fear as it is an indication that your cusp of going out of the business.

Examples of assets are office equipment, machinery, investment, inventory, company-owned vehicles, and many more and the examples of liabilities are wages owned, taxes owed, money owed to suppliers mortgaged debt, and many more.

In Accounting

For running a business, the owner of the business must be clear about the concepts of assets and liabilities as they form the basis of the accounting business. In accounting assets and liabilities will always appear together as being the fundamental shape they help shape the financial health of your business and everything will appear correct on your balance sheet.

If talking about assets in accounting, then there are two main types of assets: current assets and noncurrent assets. Moreover, assets are also tangible and intangible resources that are owned by the owner for future economic benefit. They add value to your business and when required assets are used they turn into expenses.

Liabilities are the debts and obligations that you need to fulfill in the future and it is the money that you need to pay to someone, similarly, they can be defined as the services that you need to perform and goods you need to provide. And just like the classification of the assets, liabilities are also of two types: current liabilities and non-current liabilities.

Current liabilities are those liabilities that are used within one year of their accounting period and the examples of the current assets are sales tax, short term loans, payroll taxes, outstanding expenses, bank overdrafts, account payable, and many others whereas non-current liabilities are those whose financial obligations that are not due for the settlement within one accounting period of the business also known as long-term liabilities their examples are pension liabilities, notes payable, capital leases, long-term borrowing and many more.

The difference between assets and liabilities has been explained to you but remember that both elements of the accounting stand at equal importance on the balance sheet for accurate reflection of your business’s financial position.

Rich dad poor dad

In the simplest terms, assets are the investments and securities of the owner and liabilities are the commitments and obligations of the same person.

Some must-read books are recommended for personal finance that will help develop good saving habits within you and undergoing training will be a great step for you to improve your economic control for the better control and management of finance and balanced financial freedom.

While some rely on their spending habits and succeed in managing perfectly well as it is useful for setting up your budget and expanding your business.

According to the knowledge of accounting, it is the direction of cash flow that will determine whether something that you have at the moment is an asset or a liability.

Among the different philosophies that are available at the moment for the better comprehension of your finances one of the most used and believed is the Rich Dad, Poor Dad. It offers smart ways for escaping through the vicious circle of working hard under the instructions of others while failing to save anything.

The first basic concept that this philosophy teaches is the phrase “live to work or work to live”. This phrase defines the purpose of working for more than half of the population of the world as they work to survive as when they have money they can ride out of them. Most middle and working-class people fall into this category.

Another concept upon which this philosophy throws light is that money is not the greatest asset of any person which differs from the above-mentioned explanation.

If people are open-minded and flexible they will not need money to get richer if a person is of the mind that capital will solve all the problems, they will usually have problems throughout his whole life. Your intelligence can help you in solving your problems and producing money. According to Robert Kiyosaki, money without financial intelligence is quickly lost.

With Examples

Keeping into consideration the philosophy of Rich Dad and Poor Dad, assets are the items that have some value and it produces income for you, and carries a market value. For example, three assets that are always the focus of attention are real estate, business, and paper (including bonds, mutual funds, and stocks).

As it is known now that liabilities are the services that have to be performed by the same person who demanded them but it should also be known that all the liabilities are not bad but time liabilities can likely damage your cash flow without you even noticing.

It can be set out as the traps into which you can slip as your income may be tempting to spend the money as far as it comes. The key concept about the term liabilities is that these are purchases that are likely to take you away from the financial position including car loans, school loans, credit card loans, and many other types of loans.

Read also: What is Passive Income; Rental income is; Ethics in banking

External resources: Masterclass

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