Life Lessons: 6 – Know the difference between assets and liabilities

This is the continuing series of the 100 lessons I have learnt in life so far. This is the Lesson number 6 .click here to read lesson number 5

In both high school and the university I studied accounting and I actually majored in accounting at the University, so the words asset and liabilities and their business definitions have been no strangers to me. And I am very sure I am not the first person from whom you have heard these two words.

In pure accounting terms, an asset is defined ‘’as a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise’’ and a liability is defined as a ‘’current obligation of an entity arising from past transactions or events’’

But why should you bother to know the difference between an asset and a liability, well because I later realised that those definitions are fine for the dictionary and the balance sheet, but for ‘normal’ everyday life these are not the definitions to live by.

The definition that makes more sense to the life I am living is this one from Robert Kiyosaki’s ‘Rich Dad and Poor Dad’ an asset is ‘what brings money into your pocket and a liability is what takes money from your pocket. Simple! And that’s the definition you need. Why? Okay let me give you an example.

If you have a car, the Accounting and dictionary definitions will tell that you have an asset but if you go by Robert’s definition well it depends on whether its bring in money into your pocket or takes it out of your pocket. So if your car was a taxi working for you what is it? Or if it was you private car for which you buy gas for each day, what is it?

So my good friend, the next time you buy anything ask yourself ''Am I buying an asset or a liability?''. My advice: spend your time buying assets and not liabilities or you will find yourself driving your car in the rat race.

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