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Can you tell an asset from a liability?

Discussion in 'General Business' started by LaasuunKaan Bsharoegh, May 21, 2014.

  1. #1
    Ever since I played Cashflow, its a game by the creator of the best selling book Rich Dad, Poor Dad. I'm starting to see why in that book they call an asset something that pays you month after month, and a liability something that costs you money every month.

    For example, lets say that I have a job paying $2,000 a month. Then I go and purchase a smartphone that costs me $100 bucks a month. The job in itself is not an asset since if I get fired I lose my income, then I can't pay for my liability, the smartphone.

    Now lets say before I purchase the smartphone I go to the stock exchange and purchase 500 shares of MTGE for $10,000. MTGE pays a dividend of $2.6 a share per year. So 2.6 times 500 is equal to $1300 a year, thus that becomes an asset since it pays me. Also since MTGE now pays me $1,300 a year and my smartphone costs me $960 a year (80x12=960) my shares of MTGE can pay the bill on my smartphone and I can use my income from my job to purchase more assets.

    What do you guys think?
     
    LaasuunKaan Bsharoegh, May 21, 2014 IP
  2. jrbiz

    jrbiz Prominent Member

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    #2
    Your description is a good start. Note that your cash in the bank from your job is also an asset (in the real world, anyway.) So, you do not have to buy stock with it for it to be an asset. And an asset does not have to produce income to be an asset. For example, your house is an asset, even though it costs you money to maintain, taxes, etc., because it has value in and of itself and you could liquidate it for cash.

    Going a little further down this line of reasoning: your smartphone, itself, is an asset because it has some value that you could sell it for. The smartphone contract that you signed is the actual liability.

    Now I remember why I dislike accounting so much.
     
    jrbiz, May 21, 2014 IP
  3. WalletMentor

    WalletMentor Member

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    #3
    A professor once gave me a simple breakdown: Assets = money in / Liability = money out. Investments are tricky, and depends on how you're making the assessment (long-term vs short-term).
     
    WalletMentor, May 27, 2014 IP
  4. sarahk

    sarahk iTamer Staff

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    #4
    A key thing that it tries to teach is that not everything you buy is an asset. That great car you bought just devalued thousands of dollars when you drove it off the yard. Lots of people who earn big money have little to show for it - their purchases on clothes and dining out have no residual value.

    My Mum was an avid collector of silverware and spent a phenomenal amount on the pieces she owned. However when the time came to sell them the "value" was heartbreaking - I'd get more selling a second hand smartphone.

    Buy stuff if you will get pleasure from owning it, but get real about what is an expense and what is an asset.
     
    sarahk, May 27, 2014 IP
  5. jrbiz

    jrbiz Prominent Member

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    #5
    Well, a professor or book author can assign whatever meaning they would like to words; however, if you are accounting for yourself, for a business, or for a regulating agency, an asset is something that you own that has value. It really does not matter if you bought it for $1,000 and it is now worth $1.50; an asset is an asset. By the way, that includes Accounts Receivable or money that is owed you. Of course, on the other side of the ledger, the taxes that you may owe on this asset (e.g., if it is property) would be a liability.

    I do understand their intent which is to point out that some assets are higher quality than others because they may grow in and of themselves (e.g., property values going up) while other assets may depreciate and lose value quickly (e.g., PC's or cellphones being obsolete the minute you buy them), thereby making them bad things to try to acquire to build wealth. But I wish that they would be a little creative and develop their own, unique terminology (e.g., A-List Assets vs D-List Assets) so as not to confuse real business terms that are used all of the time. If someone "learns" about assets from one of these folks and ends up discussing the topic with experienced businesspeople, s/he will look ill-informed.
     
    jrbiz, May 27, 2014 IP
  6. twothirdsreturn

    twothirdsreturn Member

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    #6
    I major in accounting as well as CS (its a long story and some bad luck but I ended up with two majors, ouch) so lets get technical, then we can get real.

    Technical:

    Asset: A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.
    Liability: A company's legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services.

    Technically, a car that you make payments on is an asset, even though Cashflow would categorize it as a liability.
    A house is the same. These usually fall under the Category of Property Plant and Equipment on the Asset section of the Balance Sheet.

    Also, technically speaking, whatever recurring revenue engine that you have isnt found on the balance sheet at all.

    Say you have a website that generates 1M dollars a month. The assets on the balance sheet would not show the website's actual resale value, which could be like 100M or something. Instead it would show the historical cost (what you bought it for) of the website domain, 12.99 from GoDaddy, then your servers that you own, 100 bucks, and then the cash in your account which could be $10 dollars in the first month.

    Get Real:

    People are the most important assets and liabilities.

    People built facebook, google, yahoo, amazon, ebay, kickstarter, etc.
    People built worms, viruses, botnets, malware sites, etc.

    Want to tell between a liability and an asset, look at peoples hearts.

    -twothirdsreturn
     
    twothirdsreturn, Jun 3, 2014 IP
    jrbiz likes this.
  7. jrbiz

    jrbiz Prominent Member

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    #7
    twothirdsreturn has given a great technical definition of assets and liabilities. The reason that recurring revenue or potential worth of a website or the "value" of human assets/liabilities are not technically counted as assets/liabilities is because they are not certain and, in many cases, cannot be measured for true/actual monetary value. Of course, HR and management people talk about human "assets" all of the time but it is because of verbal laziness. Human "assets" are very ephemeral. Humans get hit by buses, switch jobs, become less or more productive, and more. They cannot be counted on or measured for any real balance sheet value. They are not, therefore, true assets except for those who are linguistically challenged and cannot come up with a better word for their potential value to an organization.
     
    jrbiz, Jun 4, 2014 IP