Investment talk: The difference between assets and liabilities

With the CV Coach

In this instalment, the CV Coach is looking into the investment cycle, and the need for financial literacy, as history have shown that many have struggled to separate the wheat from the chaff when it comes to business terms assets and liabilities.

Many have seen the going getting tough, and failed to narrate how and why that is so. It is because of lack of the technical know-how of the money movement system and the dynamics of how actually money works, that led to the failure by many to survive the storm more-so current economic set-up.

The failure to distinguish assets from liabilities has affected many would-be entrepreneurs, at the same time leading many to get it hard to come out of poverty. Some have made overnight fortunes like winning lottos, but failed to make it in life owing to lack of money movement dynamics.

In some instances many have acquired goods both moveable and immovable items, and call such items assets, while failing to utilise them as such. In some instances the acquired items have in fact been drawing money instead of bringing it. Be that as it may, when it comes to business sense, assets bring revenue, i.e. can be liquidated, while liabilities draw money out.

My accounting teacher used to say and I quote; “Your house can be one of your most valuable asset, or liability depending on how you are using it.”

Back then at high school level, that statement used to confuse most of us in the class, as we had been raised by parents who with no strings attached, viewed and regarded houses as assets in both businesses or otherwise.

According to my teacher in business language, a house becomes an assets when it gives you some form of returns, that income, for instance when you put tenants in it, and receive money in form of rentals, then it becomes an asset.

On the other hand, if a house is drawing out money from your purse, it then becomes a liability. In business sense, the ability to distinguish between assets and liabilities is the beginning of financial literacy.

For some a typical trend is that their job provides them with income, but instead of investing in things (assets) that generate money for them, they spend the revenue on things that draw money from them (liabilities).

Meanwhile, financial experts call for the acquisition of assets; if one wants to entertain the idea of making it in business life. This is what makes the Balance Sheet one of the key compasses, in determining areas of investing as far as the money market is concerned, they argue.

“Income should be higher than expenses, and assets should be greater than liabilities. When this is your position, it means you have more income to cover your expenses and still retain a surplus which you can re-invest into your business,” economists believe.

While, in this instalment I have taken an introductory and theoretical approach of how the money system works, the next one in a series will delve deeper into the practical aspect of this complicated, but important but matter.

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