what is Assets and Liabilities.? A Simple Guide

What is Assets:

Imagine you have a magic wallet. Anything you put inside it that has value is like an asset. Assets are things a person or a business owns that can be turned into money. Here are a few examples:

1. Cash: The money you have in your pocket or bank account.
2. House: If you own a house, it's an asset because you could sell it and get money.
3. Car: Similar to a house, if you own a car, it's an asset because you could sell it.

In short, assets are like the valuable possessions that contribute to your overall wealth.

What is Liabilities:

Now, think of liabilities as the things you owe or the promises you made. Liabilities are debts or obligations that you need to take care of. Here are some common examples:

1. Loans: If you borrowed money from the bank, that's a liability because you have to pay it back.
2. Credit Card Debt: Any outstanding balance on your credit card is a liability because you have to settle it.
3. Mortgage: If you have a home loan, it's a liability because it's a promise to pay back the money you borrowed to buy your house.

In simple terms, liabilities are like the things you need to take care of or pay off.

The Balance:

Now, here's the cool part. The balance between assets and liabilities is crucial. There's a saying in accounting: "Assets = Liabilities + Equity." This means that everything you own (assets) is either funded by borrowing (liabilities) or your own money (equity).

In a nutshell, understanding your assets and liabilities helps you see the big picture of your financial situation. If you have more assets than liabilities, that's great – you're in good financial shape. If not, it might be time to make a plan to reduce those liabilities or increase your assets.