Assets vs Liabilities

What are Assets and Liabilities? Once you understand how the terms assets and liabilities are used in business, you can use that knowledge to your benefit in your personal life as well.
In accounting, assets and liabilities are terms that you will find on the balance sheet. What you own is on the left: assets. What you owe is on the right: liabilities and equity. Let’s work through some examples of assets and liabilities.
⏱️TIMESTAMPS⏱️
0:00 What are assets and liabilities
0:13 Assets and liabilities in accounting
0:25 Examples of assets and liabilities
2:00 Return on assets
2:48 Debt and cost of borrowing
3:11 Assets and liabilities in personal life
4:10 Earning assets
4:46 Assets vs wealth
Now that you understand the picture of assets, liabilities and equity on the balance sheet, let’s think of the dynamics going on in a company. A company will try to generate a return on assets. If the revenues generated (from selling goods and services) are bigger than the expenses (such as labor, materials, and depreciation of manufacturing equipment), then the company generates a profit. Return On Assets relates the amount of profit made to the assets needed to generate that profit. Some companies need very few assets to generate a substantial profit. Other companies may need a lot of assets to generate only a modest profit. Increasing ROA is generally a good thing.
On the liability side, having debt generates a cost of borrowing. The amount of interest that a company pays depends on the amount borrowed and the interest rate. If a company improves its financial health, its cost of borrowing tends to go down. In general, it is good to have a Return On Assets that far exceeds the cost of borrowing.
Let’s apply what we learned about #assets and #liabilities to assets and liabilities in your personal life. What if you own a house? That’s an asset. However, if you rent a house as a tenant, then you wouldn’t put the house on your balance sheet as an asset, as you don’t own it. What if you own a car? That is an asset as well. If you lease a car, you wouldn’t put the car on your balance sheet as an asset, as you don’t own it. What about cash? That is an asset. Unpaid creditcard bills? A liability. A portfolio of stocks? An asset. A loan agreement with a bank (for example the mortgage loan on your house)? A liability. There is one more element, which fits in the bottom right corner of the balance sheet: equity. You can calculate it by taking the total value of the assets minus the total value of the liabilities.
Within the assets in your personal life, there can be items that we call (potential) “earning assets”: cash in a savings account that pays you interest, and stocks in an investment portfolio that pay a dividend or go up (or down!) in value. Just like companies monitor their cost of borrowing closely, you should also keep track of your cost of borrowing on various types of debt you might have outstanding. Chances are that the unpaid creditcard bills carry the highest interest rate, and therefore should get the highest priority in paying down!
So what is financial wealth in somebody’s personal life? A lot of people mistake wealth for assets. We tend to think that the more assets somebody has, the wealthier that person is. But what if that beautiful yacht as well as that fancy sports car are all debt-financed? Assets increase (the person owns more), but liabilities also increase (the person owes more). The more debt you add, the more fragile you get. The true measure of financial wealth, which is often not visible to the outside world, is the amount of equity that somebody has! Assets minus liabilities. Looking at somebody’s assets without knowing how they are financed, might be deceiving. It might actually be the person with the smaller house and the older car, but with very few or even no liabilities, that is the more financially wealthy!
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better #investing decisions. Philip delivers finance training in various formats: KZbin videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[@TheFinanceStoryteller]

Enjoyed this video? Then subscribe to the channel right now, and let's explore the question "What is Equity?": kzbin.info/www/bejne/h2LdZGxrqptjrrc

[@georgegabourel8952]

According to robert Kyosaki a house and a car is not an asset because they both take money out of your pocket

[@TheFinanceStoryteller]

I have not read Robert Kyosaki's book(s), but apparently he uses the words "assets" and "liabilities" in a different way than it is defined in the world of accounting.

[@rayvonhouston7777]

george gabourel Reading it now 🤦‍♂️

[@m.sadikshaikh7687]

@@TheFinanceStoryteller you must read it sir great books

[@brotherbashir4466]

Iv'e seen liabilities like cars become assets.

[@bankeolabranco-rhodes7244]

Clear. Thank you.

[@TheFinanceStoryteller]

Great to hear that, Banke! Thank you for watching and commenting.

[@Devagrace]

Thank you for this simple and clear explanation!

[@TheFinanceStoryteller]

You're welcome! Thank you for watching and commenting.

[@rajnishsingh1094]

Good 👍 👍 👍

[@TheFinanceStoryteller]

Thank you 👍

[@rawanrezk9117]

thankyou so much for this, it helped me so much for college.

[@TheFinanceStoryteller]

Happy to hear that, Rawan! Enjoy the videos on the channel, there might be a few more that can help you in college.

[@faichalayeva3677]

Well explained 👏. Thank you! Keep it up! Good luck 👍

[@TheFinanceStoryteller]

Thank you very much! Appreciate the support. :-)

[@DrJimesTooper]

Thank you! this was super helpful

[@TheFinanceStoryteller]

I'm so glad! Thank you for watching and commenting. Please subscribe, and spread the word! 🙂

[@oreisman.]

THANK YOU!

[@TheFinanceStoryteller]

You're welcome! Happy to help.

[@sayeedm6038]

Great video! You earned a sub :)

[@TheFinanceStoryteller]

Thank you, Sayeed! Welcome to the channel.

[@ummedsinghchouhan1863]

Thank you for such a good explanation

[@TheFinanceStoryteller]

You are welcome! Happy to help.

[@tGoldenPhoenix]

thank you

[@vonvon5218]

Thank you for this amazing explanation

[@TheFinanceStoryteller]

Happy to help!

[@sizzlingsausage8413]

Thank you for this clear explanation :) I have a few questions! 1) At 2:43 you mentioned "increasing ROA is generally a good thing", when would be the case when it's a bad thing? 2) At 3:22 regarding renting not being considered an asset, I assume it's also not considered a liability. a) Is this because the rent payments are being payed off quickly versus Accounts Payable which may take longer to pay off? b) When does a payment (ex. rent payment) become considered a liability? c) If it's not an asset nor a liability, what is it? Is it some term like "cost of operations"?

[@TheFinanceStoryteller]

Thank you for your feedback and questions! Regarding 1) "increasing ROA is generally a good thing": a) the company could be underinvesting in new assets (the denominator in the ratio) and thereby limiting its future earnings potential, b) the company could be maximizing its profitability at the expense of customer satisfaction, employee satisfaction or product safety, which may hurt them in the future, in other words current period ROA looks good but it may deteriorate. Regarding 2) Expense in the income statement, usually settled in the same period as the expense occurs (debit expense, credit cash).

[@chtejaswini3021]

Thank you for your information 🙂🙂

[@TheFinanceStoryteller]

My pleasure 😊

[@m.sadikshaikh7687]

thanks sir great explanation

[@TheFinanceStoryteller]

You're welcome! :-)

[@AliAli-my9lu]

thank you very much

[@TheFinanceStoryteller]

You're welcome! :-)

[@Yasomo89]

Excellent explanation

[@TheFinanceStoryteller]

Thank you, Muhammad!

[@vestal9195]

Best explanation ever

[@TheFinanceStoryteller]

Thank you! I agree, but I might be biased. 😉

[@shubhramendonca5222]

Great video....u just earned a sub:)

[@TheFinanceStoryteller]

Thank you, Shubhra! Welcome to the channel. Please spread the word to friends and colleagues.

[@shueybosman2017]

Unbelievable you still reply till today😱. Great vid I learned a lot.

[@TheFinanceStoryteller]

Of course I still reply, that is one of the best parts of running a KZbin channel. :-) Thanks for the kind words, glad the video is helpful!

[@brotherbashir4466]

Iv'e seen liabilities like cars become assets. Attention can drive traffic. Traffic can be converted into cash flow. Also, If you put the car in the name of an entity that you control such as an LLC, then you could deduct the car and maintenance from your taxable income. Therefore, a liability can also be turned into an asset! Flex..

[@TheFinanceStoryteller]

I prefer to stick to the very simple and straightforward accounting definitions of assets being what you own, and liabilities what you owe. The rest sounds like sophistry to me.

[@brotherbashir4466]

@@TheFinanceStoryteller Without applied knowledge you can become a liability to yourself. Simply put, you are an asset. Not sophistry (argument with intention of deceiving), just going a little deeper. However, I like simplicity so people can grasp the concept first.

[@reecefuller89]

5:01 : As well as that Fanski Sports Car

[@TheFinanceStoryteller]

Did you order one yet? ;-)

[@DjStuntO]

wow i love this explanation. I owe 40K only and i earn 26k, own a polo vivo, own a plot no house yet as i still stay with my mother. I am not so bad after all. I dont wana make loans immidiately. One question. Is salary regarded as Asset?

[@TheFinanceStoryteller]

Hi! Asset, liabilities and equity go onto the balance sheet (the overview of what you own and what you owe at a point in time), while salaries go into the income statement. If you earn more than you spend (during a month, during a year), you can pay down debt and/or build equity! Does that help?

[@TerryOnDemand]

I'm confused on the "Equity" part. If equity is Assets-Liabilities, why wouldn't "equity" go in the "Assets" column?

[@TheFinanceStoryteller]

Equity represents the amount owed to shareholders. On the balance sheet, we put what we own on the left (assets), and what we owe on the right (liabilities and equity).

[@abenopatton1000]

👍👍👍👍👍

[@TheFinanceStoryteller]

Thank you, Abeno!

[@menghokhim1144]

Hello sir, your video is certainly well expounded! Although I have an inquiry. If it’s true that a person’s true financial wealth is based upon their equity, how can you know if a person has low or high equity? It’s not possible to ask a wealthy person straight up if their sports car or mega yacht is a liability or not. How can you communicate in a way to find out exactly if people are financially wealthy?

[@TheFinanceStoryteller]

It's one of the mysteries in life.... One of the ways to find out is whether they still drive that car or sail that yacht after a financial downturn. 😉 Other than that, no way to ask this politely, and even if you ask, no way to know whether you are getting an honest answer.

[@menghokhim1144]

@@TheFinanceStoryteller Thank you so much! ☺️ I will definitely use this new knowledge in future situations. As of right now, I’m only a junior in high-school trying to figure my path in life. 😅 Btw, I’m quite impressed that you are still replying to comments on a video posted over a year ago, I’ve totally learnt something new! One final question, do you have any advice or tips on how to “make friends” with or, communicate with the right people for future cooperations? What characteristics in a person should I specifically be looking for? And what characteristics should I be avoiding?

[@TheFinanceStoryteller]

Personally, I look out for people that share common interests (sports, music, art, etc.), and then see whether I feel positive energy with people (focused on growth, energetic, etc.).

[@craigtaylor4613]

HI FST, i don't understand why we add liabilities and assets together to get equity, surely you want to Take away liabilities away from assets so you are left with equity ?

[@TheFinanceStoryteller]

Hi Craig! Assets = Liabilities + Equity. This is the same as Equity = Assets - Liabilities. See also my video on the accounting equation: kzbin.info/www/bejne/hYrUnWqPbrOheMk

[@craigtaylor4613]

@@TheFinanceStoryteller ahhhh so it’s starts with the minus amount first ! How can you tell the item is a negative value in the balance sheet as it doesn’t always have -, is it just because you know it says liabilities? Your the best ! You help so much!

[@mbh1156]

what if the assets is bigger than liability and equity combined? cant seems to balanced it

[@TheFinanceStoryteller]

Nope, the accounting equation states that assets is always equal to liabilities and equity: kzbin.info/www/bejne/hYrUnWqPbrOheMk

[@shubhramendonca5222]

Can u pls make a video on IGCSE paper solving

[@TheFinanceStoryteller]

Thanks for the suggestion, but that's not an area I have expertise in.

[@antonio5856]

What can i do, if my Girlfriend is my biggest liability?

[@TheFinanceStoryteller]

The first question that I would ask is: does she feel the same way about you? ;-) Second step: watch my video on sunk costs: kzbin.info/www/bejne/oYepeIulotyprsk

[@brotherbashir4466]

Trade her before the market crashes..lol J/P

[@goldenstandard187]

aye

[@annkudhungana5170]

Can you please explain buisness transaction clearly ..

[@TheFinanceStoryteller]

Hi Annnku! Not sure what you are looking for.... is this question specifically related to this video, or are you looking for a generic description of business transactions? Here's a video that goes through the business steps as well as the financial steps of setting up a small company, maybe that helps: kzbin.info/www/bejne/rYvHkol7jZlkjbM

[@brotherbashir4466]

Cash is like water if you don't put it into a solid and limited resource it will evaporate.

[@TheFinanceStoryteller]

Hi Bashir! Self-control is the key for cash not to evaporate. And there are large benefits of having sufficient liquidity available, see my video on liquidity: kzbin.info/www/bejne/jqXNhGp5m7qGqaM

[@Adam_share]

Ur accent is too strong I couldn’t understand.

[@TheFinanceStoryteller]

Switch off the sound and switch on the subtitles, those are accent-free.