Assets & Liabilities: A fresh perspective

School has been is session for several weeks and we are deep into the content of the Small Business Management course I teach at DMACC. As an adjunct instructor, my perspective is not always purely academic. I often see students getting confused when two different classes present similar but different definitions for the same terminology.

In an attempt to help a student, I sat down with the full time faculty member who teaches Personal Finance. One of our joint students was having trouble keeping straight our two different definitions of the fundamental accounting equation. In my course, I teach ASSETS = LIABILITIES + EQUITY as this formula defines a balance sheet. In the Personal Finance course they teach ASSETS – LIABILITIES = NET WORTH since net worth is the best measurement of personal financial health. The formulas are algebraically equivalent, but presented from different perspectives.

As we discussed the pros and cons of each perspective, the full time faculty member shared with me his definition of asset which I find unique and intriguing. Traditionally an asset is defined as something of value, but in the context of personal finance he looks at an asset as something which produces income. Conversely, he expresses liabilities as something which consume income.

For example, if you own your car without a loan that would traditionally be considered an asset. Yet he teaches his students that while it has value, owning that car requires gas, maintenance, and insurance so from his personal finance perspective it is actually a liability. How interesting!

Of course he teaches his students the academic definitions too, but I applaud his practical definitions which can serve his students well as they manage their own financial lives.

Back in lectures by tompagenet

Comments

[Angie]

It sounds like the professor is from the Robert Kiyosaki school of thought. He teaches that even your home is a liability (albeit a necessary one) if it is not bringing in enough revenue to cover all costs associated with it.

[Flexo]

People can call income-producing assets "assets" and expense-incurring assets "liabilities" if they want, but reassigning definitions will only make effective communication difficult.

[Art Dinkin]

Angie: I've only heard the name of Robert Kiyosaki and know nothing of his work. Thank you for the reference.

Flexo: For communication purposes, you are right. Traditional definitions should be applied. This is more about a perspective for young college students to help them understand that some assets come with a price to maintain. Thanks for adding to the conversation.