Assets and liabilities are two of the most important components of overall financial health and having a good understanding of each of these will help you to maintain your family’s finances in a healthy state. Assets are considered to be those commodities owned by you or your family members, for instance, cash, vehicles, equipment, real estate, inventory, or accounts receivable, if you’re a business owner.
The more assets you have, or the more assets your business owns, the higher that business will be valued. In order to grow your business, you’ll need to monitor and manage your assets wisely, to get the most out of them. On the other hand, liabilities are debts that you owe to someone, including employee wages and benefits, any payments made to suppliers or vendors, or any long-term loans that you’ve taken out.
Given that liabilities will subtract from the total value of a company, you’ll need to limit your liabilities as much as possible, so as to maintain your company’s value. Liabilities should be distinguished from expenses, because they really are two entirely different things. Liabilities are debts incurred by your company, whereas expenses are normal costs of running the business, and these recur every month.
For example, a long-term loan would be a liability, but an expense would be the rent you pay to a real estate owner for your storefront. The reason it’s so important to have a solid understanding of assets and liabilities is because it’s necessary in order to establish a portfolio that will sustain you economically, and hopefully build some level of wealth in your lifetime.
Your best bet for gaining this kind of knowledge, and for having a professional safeguard your assets while growing them, is to collaborate with an Asena advisor. The specialists at Asena can advise you and use their expertise to ensure that your financial health remains in good shape indefinitely. In this article, we’ll be providing an overview of how assets and liabilities should be handled so as to ensure your future financial well-being.
The difference between assets and liabilities
It’s not enough to have the simple understanding that assets are good, and liabilities are bad. There can be a very fine line between ‘good’ and ‘bad’. For instance, if you own a brand-new Corvette, it should be a terrific asset you have. However, the monthly payments on that vehicle can be really significant, and the cost of insurance will make it expensive to keep on the road. Both of those expenses might detract from the vehicle being a good thing, even if they don’t make it something bad.
The single biggest difference between assets and liabilities is that assets will increase the value of your business, while liabilities will subtract value from it. Anytime you’re trying to determine the overall value of your business, you’ll have to add up all your assets, then subtract out all the liabilities you have. That should give you a fairly accurate representation of the true value of your business. For this reason, most business owners are generally looking to increase the number of assets they own, while also reducing the number of liabilities they owe.
Any smart business owner will probably realize that both assets and liabilities are constantly changing, because business itself is undergoing change at all times. Therefore, it becomes necessary to monitor both assets and liabilities continuously, to ensure that both are being managed properly.
Examples of assets
Just like there can be an endless array of liabilities which your family or your business might incur, so are there numerous kinds of assets that can bring value to your company. If your family owns a business, the list of potential assets can be enormous. The kinds of assets most people think of first would include cash on hand, buildings, accounts receivable, equipment, vehicles, property, bonds, stocks, mutual funds, savings accounts, and any mortgages you might be holding.
All of these will add value to your business and increase its total worth if you were to sell off the business. Anyone interested in buying your business could simply review your list of assets and see that the value of the business is directly tied to the cumulative value of your assets. Unless you keep the business in your family even beyond your own lifetime, you’ll probably want to sell at some point, so this can be an extremely important point in valuing your company.
Examples of liabilities
There are two categories of liabilities, those being current liabilities and non-current liabilities. Here are some examples of both types:
- Short-term loans
- Income taxes, sales taxes, and payroll taxes
- Outstanding expenses
- Employee wages
- Payments made to suppliers or vendors who deliver goods needed to run your business.
- Notes payable or bonds payable
- Capital leases
- Mortgage debt
- Securities like bonds or stock shares
- Pension liabilities
- Long-term borrowing on loans
- Deferred taxes and revenues
This should give you a pretty clear idea of the difference between liabilities and assets, and you can use this knowledge to make sure your business continues to operate smoothly and enjoy growth.
By understanding these two categories very well, it’ll be easier to monitor and manage both more successfully and to keep your family or business assets and liabilities in good shape.