Difference Between Liability and Asset

Ask anyone in your circle about the assets he has, and invariably the answers would include home and car. But, is your car and asset for you? Or for that matter, your home, which you have bought after taking a loan from a bank? Most people remains confused and cannot answer this question. Understanding the difference between assets and liabilities is necessary to have a better understanding of what to do with money in your hands. In a very generalized way, a liability is anything that takes money out of your pocket, an asset is anything that puts money back in your pocket. But, if you remain confused about these two concepts, read on as this article attempts to clarify these terms.

An asset is something that generates income for the owner on a regular basis. In a more traditional way of thinking, an asset is anything that can be turned into money when you so desire. If you have gold as your savings or in the form of jewelry of your wife, it can be considered an asset. Though, cash is considered asset in financial statements of companies, it is technically not an asset as it is not reproducing itself or generating money for you unless you have invested it in profitable schemes.

Liabilities are just the opposite of assets and this is reflected in the manner they are shown in a financial statement. While assets are placed in the left side of a balance sheet, liabilities always find a place in the right side of the balance sheet. All assets and liabilities get recorded in financial statements to enable a reader to know the financial condition and performance of a business or a company.

Assets are all those things a company owns such as cash, plant and machinery, raw material for products. These are recorded in terms of their dollar value in a balance sheet. There are current assets such as cash, raw materials and inventory, investments like stocks and securities in which a company invests, and capital assets like land, buildings, plant and machinery. There are intangible assets also like patents and trademarks.

In case of a business, any money that companies owe to people (stock holders and financial institutions) are referred to as its liabilities. There are both current as well as long term liabilities. Employee salaries, electricity bills, money owed to suppliers and short term loans to be rapid within a year are called current liabilities. On the other hand, all liabilities that can be carried over to next financial year are labeled as long term liabilities.