In this article, we are going to talk about what is an asset and a liability. By understanding the types of assets and liabilities, you can get rich quickly knowing how to build wealth.
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When one researches on how to earn money and become rich. Or when looking at the balance sheet, these two words “Asset” and “Liability” appear.
There are many such books and experts who say that you need assets to become rich. If you do not have assets, then you will remain poor for the rest of your life and will have to do slavery to others.
How the asset works is discussed in this article. If you want to understand the asset better, then this article can give you complete information.
Let us understand assets and liabilities.
What is an Asset?
An asset is something that can earn money now or in the future for you.
Let us know, what is an asset? Asset means property i.e. any such thing or something which can give you profit by earning money or increasing the value now or in future.
For example, like you have a house and are earning money by renting, then this house is your property or asset because you are earning money from your house.
Those who have taxi, bus, truck or commercial vehicle and all these are earning money then that vehicle is also an asset.
Same if such vehicle is not earning money then it is a liability, just like your personal car is a liability as it is not earning money.
If you have any such item from which you earn money, then it can be called an asset. Similarly, if you have your own personal car, bike, TV, mobile and are not earning from it, then it will not be counted in the asset because such things are called Liability.
If you are doing some work yourself, earning money by doing job, business, then you are an asset yourself. Because you are earning money.
Like if you have 3 members in your family who earn money then they will also be counted in the asset. If a member does not work in the family and is not earning money, then such member or people are called liabilities.
Whatever be the resource, if it is earning money now or will continue to earn in future or its value will increase in future, then it can be called an asset.
For example, rented house, land, company shares, mutual funds, bonds, gold, commercial vehicles etc.
Types of Asset
Asset is a very valuable resource for a businessman who gives money by earning money continuously. This is the means of earning which keeps on reaching profit in future.
There are many types of asset which have different definitions. Assets are those things that give future benefits to a company or an ordinary person.
You should also understand what other types of assets are. Because property is not just land and money earning thing.
Only after understanding the type of asset, you will be able to understand which asset you have. What are the types of assets.
Let us understand the types of assets.
1# Convertibility
Convertibility Assets refers to how easy it is to convert the asset into cash. If such asset can be converted into cash in convertibility, then such asset will be divided into two parts.
The convertibility is based on the asset, such as Current Asset and Fixed asset or Non Current Asset.
Let us understand the types of convertibility.
Current Asset/Liquid assets
Current asset is the asset which can be easily converted into cash. Generally, current assets are called those assets which can be converted into cash within a year.
Current assets are also called liquid assets and short term assets.
Like you have bank balance which is in digital currency. You can convert your bank balance into cash whenever you want within the next one year. So such assets are called Current Assets or Liquid Assets.
There are many examples of Current Assets like –
- Cash and cash equivalents
- Marketable securities
- Prepaid expenses
- Accounts receivable
- Inventory
- Stocks
- Bank Balance
- Receivable
Like you have a share in the stock market. Now you can convert into cash by selling shares. Such assets are called current assets.
Any asset that can be converted into cash within a year is called a current asset or Liquid Assets.
Fixed assets/Non Current Asset
Fixed assets or non-current assets are called those assets which cannot be easily converted into cash by selling. Converting fixed assets to cash requires a complex process and time.
A fixed asset is an asset that is beneficial to a company or individual for a long period of time and is an asset to be held for a long period of time. This non-current asset keeps on giving profit to the company or you for many years.
Non-current assets are also known as long-term assets, and are expected to remain productive for a business for more than a year.
Non-current assets are also called fixed assets, long term assets or hard assets.
Examples of non-current or fixed assets. like –
- Land
- Building
- Machinery
- Equipment
- Patent
- Trademark
2# Physical Existence
If assets are classified on the basis of their physical existence, assets are classified as either tangible assets or intangible assets.
The meaning of physical existence is the existence of wealth. Like whether the asset can be touched or not. Whether the property has physical existence or not.
Therefore the property under physical existence is divided into two parts. The first one is tangible assets and second one is intangiable assets.
Tangible Assets
Tangible assets are assets with physical existence (we can touch, feel and see them).
Like land, machine, vehicle, building, house, cash, inventory, all these are Tangible Assets. We can feel this property by touching it with our hands.
Intangible assets
Intangible assets are those assets which cannot be touched or felt. Intangible Assets do not have physical existence.
Intangible Assets have no physical existence but still such assets have value. Such property as copyright, patent or trademark cannot be touched.
There are many such Intangible Assets such as e-books, videos, digital content, software, apps, websites etc.
What is a Liability?
A liability is something that takes money out of your pocket.
A Liability is something that doesn’t make money, its value starts decreasing over time and costs money out of your pocket.
Today most people buy only liabilities and ignore assets. Due to which people remain poor.
For example, if a person buys a car worth 10 lakhs, he has bought a liability because buying the car will not earn money. Car will not make money but money will be spent like insurance, servicing, petrol or diesel etc.
After a few months, the price of this car of 10 lakhs will be 4 lakhs or 5 lakhs. After a few years, this 10 lakh car will have to be sold for Rs 20 per kg. The value of the car starts decreasing over time.
That’s why your personal car is a liability. Liability wastes you and your money.
If a person buys land worth Rs 10 lakh, then with time the value of that land starts increasing which can be called an asset. You can earn money by renting the land you have purchased.
Your purchased land is not a liability. Its an asset that makes money for you.
Let us understand with an example what are liabilities. Like phone, mobile, TV, car, bike, your home, electronic gadgets, freeze etc. All this costs you money out of pocket.
Do you know why people’s earnings start decreasing day by day. Why don’t people have money? The real reason for this is that your liability expenses are high, so that all the money earned is spent on liabilities.
If you want to save money then stop buying this Liability. If you want to increase your income, then start buying assets.
Asset gives you money by earning, but Liability spend your earned money. Now you have to decide whether to buy asset or Liability.
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