Many of us have this predominant misconception that any expenditure involving a huge amount of money is assumably an ASSET. Well, a liability too does involve huge amount of money. This article aims at enlightening us about what an asset actually means. Permit me to define assets and liabilities according to the International Accounting Standards (IAS), Asset is a resource controlled by the (an) entity as a result of past events and from which future economic benefits are expected to flow to the entity. I would like to capitalize on the last phase of the definition. An asset can be rightfully called an asset if and only if money or any other future economic benefits are expected to flow to you.
According to Robert Kiyosaki, author of popular bestseller Rich Dad Poor Dad, “an asset is anything that puts money into your pocket. This is contrary to the academic definition which defines an asset as anything one acquires with money and can appreciate in value. “
Well, liabilities can be defined as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of the entity’s resources
At this point, I think you should pause and take inventory of all the things you have acquired with money over the years and ascertain whether they are assets or liabilities. Are they generating money for you or not. What are they bringing in for you. Take a look at the expensive car you are using, the big house you have, the gold jewelleries you import from different countries. Is it generating cash flow for you or rather it is generating expenses in order for it to be maintained. Robert Kiyosaki has always preached that your house is not an asset and this saying is very true. If it cannot generate cash for you, it does not fulfill the requirements of the definition of an asset. Rather, when building your house, why don’t you build extra flat(s) with it for rentals. This will generate income for you.
It is only an income-generating asset that can bring wealth to your purse and can justify the capital expenditure you make. So next time you are making that huge purchase, ask yourself is this an asset or a liability. Choose Wisely!
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Originally posted on February 12th 2018 on www.thefinancialliterate.wordpress.com (A previous version of The Financial Literate)