I’ve been into several arguments with my friends and family over the general idea of Assets and Liabilities.
While growing through the educational system, we were taught as a general dogma that Assets are basically things that stands the test of time and are valuable to the owner even in the long run while liabilities are things whose values depletes over a period of time. This has some peculiarities to the ideology of needs and wants as propounded by Abraham in his theory of hierarchy of needs.
Maslow first introduced his concept of a hierarchy of needs in his 1943 paper "A Theory of Human Motivation" and his subsequent book Motivation and Personality. This hierarchy suggests that people are motivated to fulfill basic needs before moving on to other, more advanced needs. The needs are aligned in form of a pyramid starting from the lowest and most important need of a man to the highest point of self actualization.
Abraham Maslow studied and understood human psychological behaviour before coming up with this theory. Naturally Needs are placed over wants thats why at the bottom of the heirarchy of needs you see that the basic things of life takes their place. Like having shelter and food afterwards the man thinks about the safety and security of his life, family and livelihood, before moving up to his social needs, then to the esteem needs and self actualization needs.
Using the hierarchy, Acquisition of assets is a need and major one that starts from the bottom of the pyramid. Man’s idea of having shelter is an idea of having a home, a house etc which relates to having an asset while at the top of the ladder are esteem needs which basically are what the man needs to show and be classy in the society to boost his self esteem and stroke his ego. This basically are stuffs like cars, accessories etc which generally falls under liabilities as most times they depreciate over a period of time and lose value.
Assets are persons or things that can produce value. People can be assets because of the value they bring to a relationship or organization. Things which are assets have value for the owner because they can be converted into cash. Cash on hand is also considered an asset. Assets in short can be translated to value. Anything that has value and can retain it’s value over time are assets.
Assets are the items you own that can provide future economic benefit while Liabilities are what you owe other parties. In short, assets put money in your pocket, and liabilities take money out!
Assets increase your value and equity, while liabilities decrease your value and equity. The more your assets outweigh your liabilities, the stronger your financial health. But if you find yourself with more liabilities than assets, you may be on the cusp of going out of business or going bankrupt.
liabilities include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and all accrued expenses.
Now the big question??????
HOW IS THE GENERAL IDEA OF ASSETS AND LIABILITIES FLAWED?
The idea of assets to liabilities is relative as what’s an assets today can can be a liability tomorrow.
Let me paint you a picture of two scenarios to buttress this point.
John and Philip both have a 2021 Toyota Camry car for their personal use. John on weekends and off days occasionally use the car for Uber while Philip just parks his car at the frontage and leave it there till he needs to go out. A few months down the line both John and Philip were out of Job due to a massive downsizing and John decided to continue his Uber riding full time while Philip decided to go job hunting and couldn’t get any for few weeks meanwhile he had to spend on the maintenance of the car weekly. John wasn’t feeling this brunt because due to the business he runs he is able to pay for his maintenance, his mortage and all other bills without having to take another loan.
This simplifies my argument as when both of them lost their jobs, the car became an asset to one and a liability to the other. John saw bis car as an asset because it brings him value and the money he spends on the car is not upto what he gets from using the car. For Philip on the other hand, the car became a liability has he spends on it dor maintenance and not getting anything from it apart from comfort of moving from one place to the other. Eventually he’d sell the car to cut down his expense which equals seeing it as a liability.
Second Picture
A rich man has a mansion of so many rooms and other properties , suddenly he had issues with his business and everything went downhill but he had his mansion to himself with numerous staffs for it’s maintenance. Gradually the little funds he had began to deplete as he spends it on paying his staffs and maintaining the elegance of his mansion. He thought much about what to do because he doesn’t want to lose his property nor sell it nor does he want a loan from the bank. After sleepless nights if brainstorming, he decided to convert the mansion to an hotel while maintaining his staffs and a part of the mansion as his oersonal abode. Few years down the line the hotel became an household name and one of the best to reckon with. With that single idea he was able to restructure his finances, retain his property and staffs, and also acquire more assets.
The example of this man shows that what you see as assets can be liabilities if not properly managed and what’s a liability to you is someones asset provided he gets value from it.
To simply put, Assets equals continuous value increment while Liability equals depreciation in value.