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Assets vs Liabilities
After knowing about what is income and expense, the next level that we are going to look at is net worth. It consist of 2 components, assets and liabilities. Once you start accumulating assets(savings) from income and expense, you are getting closer to financial freedom. With more assets to net off your liabilities, you will be in the positive net worth position. In business and accounting, an asset is defined as a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction or event. They can be classified as current and fixed assets. Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets. They are cash and cash equivalents, short-term investments, receivables, inventory, prepaid expenses. Insurance can be classified as assets, long-term investments. Fixed assets is referred to as PPE (property, plant, and equipment), or tangible assets, these are purchased for continued and long-term use in earning profit in a business. This group includes land, buildings, machinery, furniture, tools, and certain wasting resources e.g., timberland and minerals. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land). These are also called capital assets in management accounting. In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Liabilities are reported on a balance sheet and are usually divided into two categories. They are current and long-term liabilities. Current liabilities are reasonably expected to be liquidated within a year. They usually include payable such as wages, accounts, taxes, and accounts payable, unearned revenue when adjusting entries, portions of long-term bonds to be paid this year, short-term obligations (e.g. from purchase of equipment) and others. For individuals, it can be credit card bills, short-term loan, IOU or personal loan. Long-term liabilities are reasonably expected not to be liquidated within a year. They usually include issued long-term bonds, notes payable, long-term leases, pension obligations, and long-term product warranties. For individuals, it can be housing loan, car loan or renovation loan. It's getting exciting. |
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