MARKETS 101: What is an ‘Asset’ and A ‘Liability’?

Robert Kiyosaki once said that for you to be rich, you must be able to interpret a financial statement. Truth be told, you don’t have to be an accountant but understanding the basics is crucial and not just in becoming rich but also in managing your money. A financial statement shows the performance, the well-being and the flows of cash of an entity.

The main components of a financial statement are income, expenses, assets and liabilities. To begin with, income is the money that gets into your pocket after work done or once you sell off an item. On the other hand, an expense is an activity or item that causes money to get out of your pocket. As such,
when you work and you get paid at the end of the month, you get an income. When you pay your landlord, you incur an expense. The food that you buy is also an expense. These two, income and expense are found in the financial statements as what is called the Profit and Loss statement or what has lately been dubbed as the Income statement. When we talk of a profitable or good business, it is achieved out of maximizing the money getting in and cutting on the money flowing out. The beauty of the financial statement is that it is interlinked, let’s find out how.

An asset in is something that puts money into your pocket. An asset will therefore according to the definitions above, attract you income. On the other hand, a liability is the resulting effect after you have committed to take away money from your pocket and you don’t pay. You therefore owe someone money. According to the definitions above, a liability results from an expense. Both asset and liability are found in the financial statement in the balance sheet page or what has been recently dubbed as the statement of financial position.

To have a better understanding of these terms, list down your income and expenditures in a particular month as well as your assets and liabilities.