How can my assets be liabilities? Traditionally, assets are defined as things we own while liabilities are defined as things we owe. To an accountant, these definitions are acceptable.
Recently, assets and liabilities have got more robust definitions. Assets have been defined as income generators while liabilities are cost accumulators. Given this, an asset which we traditionally own could turn out to be a cost or expense accumulator.
Now that we know, let us start to analyse different scenarios and see whether we have an asset or a liability.
I can readily afford a $5,000 worth of car but because I am conscious of class and ego, I took up a loan of $25,000 at an unattractive interest rate to buy a car that meets my perceived standard. Month in month out, the car continues to depreciate; whereas, expenses continue to build up in respect of interest on loan repayment.
In this instance, I am carrying a liability which has the tendency of crippling me financially and preventing me from taking advantage of opportunities that may arise.
I have the opportunity of investing $100,000 in real estate. I could either buy a flat in a condominium situated in an urban area or buy a magnificent duplex in a remote location in a rural area with the same sum. It is estimated that the flat will realise $9,000 per annum whereas the duplex will realise nothing (the duplex is to be my holiday home where I stay in whenever I go to my home town; I will live there on an average of 15 days in a year).
After careful analysis, I chose the duplex over the flat. My choice was in fulfilment of an age-long traditional requirement of the need to have a property in my hometown.
With this choice, I am carrying a liability as the alternative forgone (the flat) would have returned an annual 9% return on investment.
Now, I know where I stand. Do you know where you stand? Are your assets liabilities?