What is Asset and Liabilities? What are the differences? Can an asset be a liability in different situation?

Assets and liabilities are the most common terms used in accounting, finance and business. But if we look at it from a different angle then these two are also involved in our life everywhere. So let's try n understand these terms from a practical point of view without considering any theoretical aspect. 

What is an Asset?

We can define asset in simplest form as "Anything that can add some value to your wealth or increase your wealth(has an appreciating nature) then it is an asset." To understand we can say that an asset will always have higher value (in the future as compared to the one it has at present) or it should generate money (but that money should be greater than its depreciating value). For example 

1. Cash,
2. Investments (in certain situation not all the time),
3. Fixed Deposit,
4. Property,
5. Vehicles (in certain situation not all the time) 

What is a Liability?

In simple words liability is "Anything that is taking money away from you or decreasing your wealth(has a depreciating nature)". Here money is going outside or the value of money is decreasing anyway, and so will definitely result in decrease in your wealth.

The more your assets outweigh your liabilities, the stronger the financial health of your wealth.

What are the differences?

Assets add value/money to your pocket and increase your wealth, while liabilities decrease your value/money and wealth. The more your assets outweigh your liabilities, the stronger the financial health of your wealth. But if you find yourself with more liabilities than assets, you may get poor very soon. For example 

1. Bank debt,
2. Home Loan,
3. Taxes owed,
4. Vehicles (in certain situation not all the time),
5. Investments(in certain situation not all the time)

Now you are seeing that Vehicles and Investments are present in both the above sections. Now question arises "Can an asset act as a liability in a different situation?" and the answer is "YES".
Can an asset act as a liability in different situation?

An asset can act as a liability in certain situation if you don't use it properly. Let's take a hypothetical example of a car owned by an upper middle class person (considering Indian costs and also the calculations have been done in INR)-

• Car price : 6,00,000 to 8,00,000 INR including all taxes.
• Per Year Depreciation cost : 10 to 15%
• Per Year Insurance cost :  18000 to 25000 INR
• Fuel Cost per km : 5.00 to 7.00 INR 
• Service & Maintenance Cost per km : 1.30 to 1.80 INR
• Driver (If you keep, avg salary per month): 5,000 to 10,000 INR
• Parking (Aggregate): 1000 INR
• Toll and Other Charges (Aggregate) : 1000 INR

Let's calculate, if you are running this car for personal use and per year run is 5000 km then for the first year it will cost you around : 1,71,500 INR
Total expanses or deductions in value = Dep.+Insu+Fuel+Service+Driver+Parking+Toll and Other charges

 60,000 + 18,000 + 25000 + 6500 + 12*5000 + 1000 + 1000
= 1,71,500 INR (All calculations are done considering minimum charges).

Now if you put the same car into taxi service and it runs 250 km a day and gives you Rs. 2.00 per km as your earning after all kinds of deductions(like driver salary, insurance, parking, toll, fuel cost, depreciation etc.),
Total earning or profit against deductions = 250*365*2.00
= 1,82,500 INR
Let's see what we are trying to tell you-

In one scenario, one item is generating money in other situation the same item is taking money away. Let's say, you also need a car but you don't travel much and you might use it only three to four times in a quarter or less than that. I am assuming here that for the entire period, you travel only 5000 km. Now, if you take any cab service OLA/Uber/Any Other local taxi for the same then on considering service charge @ 12 INR per km, the total expanse on the service will cost you around 5000*12 = 60000 INR. Here you can clearly see that instead of spending 1,71,500 INR and you can generate Rs. 1,22,500 INR (i.e. 1,82,500-60000) without compromising your lifestyle. These calculations may not fit for everyone and in every situation but the point is, identification of an asset or a liability and most importantly, when an asset can act as a liability in a different situation. 

To conclude, it can be said here that An asset can become a liability or a liability can be used as an asset as per its use.

Note: I didn't add the interest rate in the calculation but if you are owning a car on loan then you need to adjust the calculations accordingly. Also we are not promoting any cab or taxi service in the above article.

If you really want to get better understanding of assets and liabilities then you must read the book "Rich Dad, Poor Dad by Robert T. Kiyosaki"