Financial assets and liabilities

With the light hand of Robert Kiyosaki, the idol of financial enlightenment, the concept of financial assets and liabilities spread widely around the minds of people who are striving to become richer and freer. By the way, often from the books of Kiyosaki the reader makes not quite the correct idea of ​​liabilities and assets. We will deal with these basic concepts as follows.

What are assets and liabilities: two approaches

For a start, we note that there are two approaches, two definitions — Kiyosaki, well-established in accounting and accustomed to taking root. The first is considered to be right among people who are really engaged in finance , the second is captivating for its simplicity, therefore we will begin with it.

According to Kiyosaki, an asset is “everything that puts money in your pocket,” which helps to gain passive income (“actively works for you, and you yourself are passive.” Accordingly, a liability is “everything that forces you to spend money.” Profitable An investment gives you an asset – for example, good, steadily growing stocks. We pass liabilities on our necks, for example, when we buy a house on credit – we have to constantly pay interest to the bank. It’s very simple, isn’t it?

Let us leave this interpretation for the time being and move on to the “real” accounting understanding of assets and liabilities . It is only slightly more complicated than the replicated American formula.

Liabilities and assets are two parts of the balance sheet, which is a simple form of summarizing information about the activities and economic situation of a company. Do not be afraid of the phrase “balance sheet”. In fact, this is just a table with which you can quickly find answers to many questions:

  • What does the company own?
  • Who owns the company?
  • What is the company’s turnover?
  • Where does the company get the money?

The column “assets” contains the property of the enterprise :

  • working capital (money in the current account, purchased raw materials, spare parts for equipment, etc.)
  • non-current capital (otherwise the main one is the buildings and structures in which production takes place, offices, main intellectual property (patents) and so on up to rights to certain domain names: for example, for Yandex, owning the ya.ru domain is more than important part of the capital).

In the “liabilities” column are sources of property (a very accurate phrase that reflects the essence well. It will still be useful to us.):

  • Own money: authorized capital (owner), not distributed profit;
  • Borrowed capital – loans, loans for business development;
  • Shareholder money.

Why are liabilities called sources of assets? Yes, because you can increase assets at the expense of liabilities. These two parts of the table correspond to each other (it is not for nothing that it is called the balance). In addition, in the conditions of proper (more precisely, legal) business, these two scales are constantly balanced.

For example: a company takes a loan of $ 1 million. This leads to 2 consequences: 
a) a million dollars appears on her current accounts (an increase in column A) 
b) a million dollars is added to her liabilities, borrowed capital (an increase in column P).

Finally, to make it completely clear, we turn to the definitions of the international financial reporting system (IFRS). According to these definitions, the following formula is obtained:Assets = Liabilities = Capital + Liabilities

So, if everything is pretty clear with liabilities and assets, then such a familiar word “capital” is defined as “this is a share in the assets of a company that remains after deducting all its liabilities”. Be sure to pay attention to this phrase! (it will come in handy later)

A proper understanding of financial liabilities and human assets

Why such a detailed presentation on the pages of a site dedicated to simple financial literacy ? There are two reasons:

a) Understanding these principles of accounting allows you to better understand the essence of financial liabilities and assets in relation to personal money, family budget, and to correctly orient oneself regarding its formation.

b) Own business is one of the main ways to achieve financial independence . So it’s better to know than not to know basic things regarding accounting

Well, actually to the main topic. To the correct understanding of the subject of our conversation in relation to one person. As I said, the definition of Kiyosaki seems too simplistic and even distorts reality. And this is dangerous – because, thinking distorted, with wrong concepts, we will take wrong decisions related to money.

Therefore, I propose to transfer the concept adopted in the accounting world to personal finance. Then it turns out that:

assets are what a person owns and uses in his life, regardless of whether it requires expenditures or, on the contrary, brings income .

liabilities is the sum of a person’s liabilities. That is: all his debts, duties to pay taxes, insurance premiums, and so on, up to the need to make gifts to unloved relatives and not distributed profits .

(Distributed profit – ceases to exist in the real world, it turns into assets. The profit accumulated over the years of life – this is capital).

What is the fundamental difference between such approaches? It is very simple: if we consider the personal budget from the point of view of the concepts adopted in accounting, then the two parts of tables “A” and “P” are so different that they cannot be confused at all. 

Assets – really exist. These are things, securities, objects of copyright. 
Liabilities – only show the attitude of different people and companies to assets. They exist only in relations between people and in their memory, on paper. Is it possible to feel the debt or stitched account? You can only touch the paper. And the profit accumulated over the years of life? It has turned into real things and is only in our memory (and, for especially accurate people) – in records, cash reports.

Why is this definition better? It is no better. It is just more accurate. Kiyosaki wrote for Americans (and he himself came from the same place), so all of his principles were nailed to concrete objects with iron nails. As I understand it, it is inconceivable for him to build his concepts on what is not in reality, what cannot be touched. But the liabilities (real!) Are just that. Therefore, with all due respect to the “guru” of financial literacy, it is better to remember and assimilate the generally accepted definition. Do you doubt that this is so important? In vain. Read about it here: What it means to buy assets . I hope this material will help you better understand the rules of financially reasonable behavior based on a simple balance sheet.

Rachel
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