How people can be transformed from liability to asset
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An asset is something you own and a liability is something you owe, so how can a liability ever be turned into a asset or profit?
Perhaps we should start by reviewing the following equations:
More assets than liabilities = profit
More liabilities than assets = loss
More income than expenses = profit
More expenses than income = loss
All of the above equations are correct, however these terms can cause us problems every day. Assets versus liabilities, income versus expenses, debits and credits, profit, loss, surplus, deficits…
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A liability however is an obligation, the settlement of which would result in the outflow of economic resources. An increase in an asset can be as a result of an increase in liability. The alternative of liability is equity. All assets are obtained by either liability or equity or a mix of the two.
Asset transformation is the process of creating a new asset (loan) from liabilities (deposits) with different characteristics by converting small denomination, immediately available and relatively risk free bank deposits into loans–new relatively risky, large denomination asset–that are repaid following a set schedule.
According to accounting standards, assets are something which is owned by you and can provide future economic benefits. Example: Land & buildings, cash in hand, Cash at bank etc. Liabilities are something which an individual or a company owes. Example: Bank overdraft, account payable etc.
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