When it comes to defining assets and liabilities, traditional definitions can be quite confusing. But here at PCR Accounting & Advisory, we thought we’d shed some light on the topic and make things a little easier to understand.
What is an asset?
If we are to follow the accounting definition, assets are resources owned by a person and/or company that have future economic value that can be measured and can be expressed in dollars.
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Traditionally, things that are considered assets include:
- Real estate
- Personal contents
- High-value items such as jewellery, musical instruments, technology etc.
But it’s also important to consider assets such as
- Intellectual property
- Business ownership
What is a liability?
In accounting, liabilities are considered the future sacrifices of economic benefits that the entity (person and/or company) is presently obliged to make to other entities as a result of past transactions or other past events.
Traditionally, things that are considered liabilities include:
- Car loans
- Home loans
- Credit cards/store cards
- Investment loans
- Money you owe to bill providers
- Other unmet commitments such as leases etc.
But at PCR, we take a slightly different (and simpler) approach when defining assets and liabilities.
We define an asset as an item that provides ongoing cashflow to the owner, while a liability is an item that provides negative cashflow to the owner.
Under these definitions, what most people in Australia consider their biggest asset – the house that they live in – is actually a liability. Does it provide you with cashflow? No. Does it cost you money to own? Yes!
What about your car and personal contents? A car is a liability as it takes cash to run and maintain, and most cars depreciate in value. Personal contents is just stuff. We all know it isn’t worth what it is insured for because no one values your stuff except you. This alternative view of assets and liabilities comes from businessman and author Robert Kiyosaki.
By following the principle that assets put money in your pockets, while liabilities take money from your pockets, it is easier to gauge what is worth spending your hard-earned money on and have a clearer picture of your cashflow.
For example, PCR’s Managing Director, Peter Marmara-Stewart, has recently written and released a new book, Managing Money. This book can be considered one of his assets. Why? Because it generates ongoing cashflow for him.
While most people wouldn’t consider putting a book on their balance sheet, it’s important to remember that anything generating cashflow for you is an asset.
Once you know what your assets and liabilities are, it’s important to manage them accordingly. You can safeguard your assets with asset protection strategies and get advice on appropriate risk management and debt recycling strategies for your liabilities.
In summary, assets bring in cash and liabilities take cash. If you would like to explore asset protection strategies or improve your cashflow, get in contact with PCR Accounting & Advisory today on 03 9847 7516.
Owner of PCR Accounting & Advisory, Peter Marmara-Stewart is a top-tier accountant and financial advisor dedicated to helping clients reach their business goals and achieve financial freedom. Peter is highly regarded for his client-focused approach and entrepreneurial spirit, catering to a diverse range of professionals across a wide scope of industries all across the country. Peter’s expertise can help you plan effectively, set goals, maximise profits and protect your assets. Get in touch today on (03) 9847 7516.