Assets and liabilities are the two pillars of accounting and every student going into commerce field will hear these two terms more often than his or her name. To understand both the terms better, let’s look at some of the differences between assets and liabilities –
- In simple words assets are those which are yours and therefore a person who is having more assets is likely to have peace of mind whereas liabilities are those which belongs to others and you are using it and therefore any person having more liabilities will always be thinking how to repay them and therefore he or she is likely to have sleepless nights.
- Assets generate income in the form of interest, dividends while liabilities generate expenses in the form of interest payment.
- Examples of assets are land, building, fixed deposits held in bank etc…. whereas examples of liabilities are bank loan, mortgage of property etc…
- In the event of some financial problem asset is your best friend as it will help you in recovering from that problem because you can sell assets to generate cash and get over your financial trouble. While liabilities are exact opposite it’s like a monster and when in you are in trouble this monster takes everything from you as one has to repay his or her liabilities by selling property and everything which a person owns.
- In beginning assets usually results in outlay of cash because whenever you buy it you have to pay cash whereas liabilities result in inflow of cash because in majority of cases liabilities is created because of need for cash.
- It may be possible that person having lot of assets is short of cash because of his or her investment in assets while an individual having lot of liabilities is cash rich (though he or she has to pay lot of debt)
As one can see from the above distinction between the two one can safely say that a person does not become rich by earning lots of money rather he or she becomes wealthy by creating assets and avoiding liabilities.