Understanding Asset and Liability

Introduction

It is often believed that a man who has a lot of assets is on the part towards financial freedom, while the man with much liability is digging his own grave. This statement is correct in its totality but the challenge has always been: what is the definition of these two terminologies ‘Asset’ and ‘Liability’

According to the balance sheet definition (for Accountants and Accounting students), assets can be seen as what you spent money on (e.g. house, car, stock etc), while liability is what you are owing.  This is a lay man’s understanding of this subject.  In Frederick Money management School, we have come up with a different working definition that we believe if well understood, will become the life saver for whoever wants to make the most of his resources.

For us (Frederick Money Management School):

An Asset is anything that adds value to you and that will enable you to be more productive.  It is also any transaction that will in the long run save you money and time.  That’s why an asset must have an ability to earn an income in its usage that will enable it to appreciate in value.  Anything that does not meet this test is a liability and not an asset.

What is a liability?

A liability is an expenditure that does not have the ability to add value to you in a manner that will make you more productive; It also a transaction that struggles with other resources to maintain itself.  If it cannot appreciate in time, it is a liability.

Let’s break this down.

There are certain expenditures that are assets to some people while they are a liability to others.  

Imagine: A guy who buys a laptop and loads with an application package worth N350 and only needs the laptop to browse the web.

Let us look out our expenditure pattern and let’s subject them to this definition and answer the following questions:

1.      Are these assets e.g. car, clothes, phone, house, laptop etc?

2.     If yes, what amount of value are they adding to me?

3.     Could I justify the expenditure?

4.     Could I get this same value with less spending?

5.     Or this I just buy because I liked it and my friends have it?

When goods are produced, there is an ability package inside of it that makes the prize to add value. These are the value added that you must first analyze and check if they are of value to you.  Imagine somebody who drives 150km to and fro work buying a V-8 engine car and he is a middle class worker with N130, 000 monthly salary (with the current pump price, he will spend as much as N60, 000 monthly on fuel).   Can this car add the value that much?

Imagine a marketing representative whose nature of work is to be mobile and chooses to spend much on a high earn cell phone. It’s just a matter of time, he is bound to destroy or misplace the phone (It is worse if he has jump buses or taxi)

Having carried out a survey, we have discovered that most of the expenses carried out by Nigerians are all that of liability and not asset.  

The phone line would be open between 11:00am and 12pm. Call 08186515035  if you have questions. 

Idowu Okungbowa is the Managing Consultant of ‘Fredericks International’, a Human Capital Development and Marketing Consulting Firm. He is a public speaker and he has a great interest in youth development and entertainment. Email: idowuokungbowa@yahoo.com.