Asset vs. Liability
In the 21st Century, the use of the words "Asset" and "Liability" have been ever present among numerous individuals, businessmen and corporations. In this blog we will explore what these terms are and what we think they are. I will try to reverse-engineer the way we understand what assets and liabilities mean to us. Enjoy!
An asset is basically a useful or valuable thing, person, or quality according to an Oxford dictionary meaning. Assets could range from a printer in an office, to hiring an experienced shop clerk to run your boutique or even a personal quality such as typing at a high speed. These are all assets because they add value or are useful in your everyday life whether it is work or business or anything else.
Picture this: Imagine buying your first piece of land for say MK 700,000 on the outskirts of your township. The excitement you would feel is that you have bought an asset. Your first one maybe. However if in 5 years from the day you bought it the land is not developed in any way and say you sell it for roughly MK 1,300,000 we would say that you made a MK 600,000 profit, almost 86%. Crazy right? Well I wouldn't be so sure of that.
In a developing country like Malawi, we are currently in an economic downturn and the value of our Kwacha is sliding by the day. With inflation rising, the money you get from that sale of the land would probably purchase land of exactly the same size or smaller by that time. Does that mean that land was valuable? If anything it does not differ from opening a fixed deposit account at a bank to pay you interest only with the hassle of physically visiting the site or finding a buyer. The value of your "asset" would have changed on paper but in reality, it is just the same piece of land you started with.
Sticking to the piece of land, during those 5 years you would probably have to hire someone to look after your piece of land to ensure that it is being kept safely. That is money you will have to part with every month or so and money you will pay from your own pocket even though you consider that land your asset, it does not put any money in your pocket until you eventually decide to sell the land but until then it will continue to take money out of your pockets and could prove to be an expensive choice. Anything that takes away money from your pocket is what I would call a liability.
An asset is basically a useful or valuable thing, person, or quality according to an Oxford dictionary meaning. Assets could range from a printer in an office, to hiring an experienced shop clerk to run your boutique or even a personal quality such as typing at a high speed. These are all assets because they add value or are useful in your everyday life whether it is work or business or anything else.
In accounting, an asset is any thing or resource that is owned by a company which has future economic value that can be measured and expressed in monetary terms. i.e. dollars, kwachas, euros, etc. Examples include cash, inventory/stock, supplies, buildings, equipment and many others.Now this all sounds good and actually agree that an asset basically means anything of value. We live in a world now where we consider things like land and houses as very valuable assets as they should be. They cost a lot of money to own and are considered the best assets one can own. But are they really assets to you?
Picture this: Imagine buying your first piece of land for say MK 700,000 on the outskirts of your township. The excitement you would feel is that you have bought an asset. Your first one maybe. However if in 5 years from the day you bought it the land is not developed in any way and say you sell it for roughly MK 1,300,000 we would say that you made a MK 600,000 profit, almost 86%. Crazy right? Well I wouldn't be so sure of that.
In a developing country like Malawi, we are currently in an economic downturn and the value of our Kwacha is sliding by the day. With inflation rising, the money you get from that sale of the land would probably purchase land of exactly the same size or smaller by that time. Does that mean that land was valuable? If anything it does not differ from opening a fixed deposit account at a bank to pay you interest only with the hassle of physically visiting the site or finding a buyer. The value of your "asset" would have changed on paper but in reality, it is just the same piece of land you started with.
Sticking to the piece of land, during those 5 years you would probably have to hire someone to look after your piece of land to ensure that it is being kept safely. That is money you will have to part with every month or so and money you will pay from your own pocket even though you consider that land your asset, it does not put any money in your pocket until you eventually decide to sell the land but until then it will continue to take money out of your pockets and could prove to be an expensive choice. Anything that takes away money from your pocket is what I would call a liability.
In accounting, liabailities are obligations of a company or organization; or they are amounts owed to lenders and suppliers. Liabilities often have the word "payable" in the account title. For instance, if you borrow money from a friend then you are "liable" to pay them back.
Now you may be asking yourself why I decided to take you into some sort of accounting class. Some of you reading this will be telling yourself that "hey, I already know this so what makes this blog post so special?" Let me be clear, this is not a lecture of any sort but more of an eye opener to view things we know differently. You will notice that I have highlighted certain keywords during this whole blog, here are the most important words/phrases I want you to remember: asset, liabilities and "your pocket". Simply put assets put money in your pocket whereas liabilities take money out of your pocket. I used the piece of land because I am sure our friends, family and colleagues will tell you that it is truly the biggest property or asset one can own and I do not disagree, I just think that you deserve to know whether it puts money in your pocket or takes money away from your pocket.
Look at everything you own or want to own and ask yourself one question: do these things put money into my pocket or not? If all you own is the cellphone you are reading this blog from, ask yourself is my phone an asset? Does it put money into my pocket? 8 out of every 10 people have phones and think they are assets because they have re-sale value but they do not realise that it is a liability to them. Why? Well probably because of the 12 hours we are glued to them on a daily basis, we use 10 of those on "non-income generating activities". i.e. selfies, double taps on Instagram, candy crush, Twitter MW, WhatsApp chain messages, the list is endless. We all have our vices and we can not always use our phones for productive things but I am sure that a couple of you going through those examples are cursing at this post saying, "hey who does this guy think he is?" lol.
I get your anger and frustration and I like it because that means we are getting somewhere. Let me tell you this, I have met people who have never double tapped an Instagram photo in their life that make 5 times your salary in a week with one app on their phone: "the dialler." Trust me, I am also in awe of them and that makes me start to ask myself the question that goes "how do I do that too?" The answer is simple: invest in assets, buy assets and put money back into your pocket. Avoid liabilities because they takeaway money from your pocket. It is a mantra, a doctrine, a code, a choice and a path one chooses to truly become free from the world and live a life without fear. I did not say it is easy and I did not say you will succeed. You will have to fail a couple of times because everything in life comes at a cost. For every Ying there is a Yang but stay the course and you shall prevail. It is not rocket science but it is an art. The art of getting unchained from the myth that it is hard to make money or I can not become financially stable to becoming a shrewd individual who owns assets that can help them afford the lifestyle they choose to lead!
I will leave you with a diagram excerpt from a book from my favourite author Robert Kiyosaki that you can ponder on. I encourage you to try and list your own assets and liabilities to see where you stand and what it means for you. So forget what you were taught, forget what you know and try to do this using the principles I explained. Should be a treat!
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