When you start running your own business, it’s important to know the difference between an asset and a liability. It may sound simple, but knowing these things is the key to being able to make long-term plans and make smarter financial decisions with confidence that you’re headed in the right direction. To help explain how this works, here are some examples of both assets and liabilities and how they can help or hurt your business over time.
Understanding Net Worth
Net worth is one of those money terms that is thrown around a lot without many people actually knowing what it means. Net worth is, in fact, quite simply your assets minus your liabilities. If you have $10,000 in assets but $15,000 in liabilities (the amount you owe), then your net worth would be -$5,000.
Personal Balance Sheet Example
$14,000 in assets ($40,000 net worth) – $6,400 in liabilities ($10,000 home mortgage + $1,500 car loan + $5,000 credit card debt) = $7,600 personal net worth. In other words: Joe Schmoe’s net worth is about $7,600.
What Does Your Balance Sheet Look Like?
$14,000 in assets ($40,000 net worth) – $6,400 in liabilities ($10,000 home mortgage + $1,500 car loan + $5,000 credit card debt) = $7,600 personal net worth. In other words: Joe Schmoe’s net worth is about $7,600.
Assets
Some assets depreciate or go down in value over time, such as cars and computers. Other assets appreciate or increase in value, such as land or stock. These are referred to as financial assets. Businesses have many types of assets: inventory; buildings; vehicles; cash in checking accounts (or other short-term investments); office equipment (computers, printers); etc.
Liabilities
Any financial obligation that you owe, such as credit card bills or car loans. Anything that ties up your assets—that is, prevents you from spending them freely—can be considered a liability. For example, you have a house with a mortgage on it; that means your house represents an asset to you (the roof over your head), but if your loan payments prevent you from using those funds elsewhere (like investing in stocks or paying off student loans), then they count as liabilities.
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