Assets and Liabilities

You here people talk about it all the time, but what exactly are assets and liabilities? 

Assets are things of value that provide future economic benefits. These benefits may mean that they can later be sold,  generate income etc. 

Liabilities are things that represent a present obligation and are most likely to result in an outflow of resources in the future. An example of such a resource may be cash. 

It is important to be able to distinguish between the two of them, the difference between them gives us the capital i.e. A-L = C 

Let's take a look at some examples:

1. Cash, contains intrinsic value and can later be exchanged for other resources perhaps. ASSET
2. Bank overdraft, arises when you spend over your available funds in your bank account. This creates an obligation which means that there is likely to be outflow of resources (money) at a later date. LIABILITY
3. Vehicle, despite many arguments that a vehicle is a liability from other areas of commerce, for accounting purposes we shall treat it as an ASSET as it will provide future economic benefits.
4. Loan on vehicle, now this is a LIABILITY, this presents a future obligation to pay.
5. Capital, money owed to the owner by the business e.g. the owner puts in money of his own to start the business, while this does present a present obligation. This is not considered a liability as it involves the owner of the business. Capital is in category of its own. 
6. Debtors or accounts receivable, people who owe the business money, arises through sales on credit. This is of future economic benefits to the business and is therefore an ASSET
7. Creditors or accounts payable, when we buy on credit, we have a present obligation to pay later- LIABILITY.

Quite simple isn't it? But it is important to be able to distinguish between the two so that entries in our accounting system are accurate. 

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