Know Your Assets and Liabilities

Business owners are, or should be, aware of assets and liabilities. This knowledge is imperative for accounting records as well as developing business plans, especially when applying for a business loan or line of credit. However, knowing your assets and liabilities is valuable knowledge for the average person.

Assets are fixed objects of value and include office building or home, furniture, electronics, inventory and vehicles. Other forms of assets are cash-on-hand, sources of income and accounts receivables for businesses. An asset many people overlook is life insurance policies that accumulate cash value. Land - including burial plots- is considered one of your greatest assets.

Some assets appreciate (grow) in value (land, buildings, homes) and others depreciate or lessen in value - automobiles, furniture (home and office), electronics. Accounts receivables fluctuate in their value with the ebb and flow of business. Unless you constantly take the money out of a life insurance policy, it too grows in value. Stocks, bonds, and savings accounts are also assets which, under normal circumstances grow in value.

Liquidable assets are those easily and quickly disposed of - cashing in an insurance policy, selling stock, savings, etc. Some are more easily liquidable than others - for instance you may get quick cash by selling stock or cashing in your life insurance policy compared to selling a home or business.

The basic definition of a liability is any bill you owe. For a business this could be office rent or note, bills for stock or inventory, utilities, payroll expenses, insurance, etc. For individuals some of these liabilities are the same...house note or rent, utilities, auto expenses, insurance costs, groceries.

In other words objects you own that have value is an asset and money you pay out on a regular basis is a liability.

You may wonder why it is important for someone other than a business owner to know his or her assets and liabilities so let's look at a couple of reasons.

#1 - Ever apply for a loan where they ask for collateral? Lending institutions need to know if you default on your loan - there is something they can seize and sell to cover your debt.

#2 - Ever wonder what your Net Worth is? Subtract your liabilities from your assets and you'll find out.

Knowing your assets and liabilities as well as your net worth is equally important for everyone.