Asset or liability

[Ivan Roberts]

I own two single family homes. One is AZ and one in WA. Assets or Liabilities?

[Bill Gulley]

Hmmmm, I see we are making this complicated. If I own a house and it is worth 100K and I owe 120K, the amount I owe does not mean the house is no longer an asset, it is an undervalued asset, if it costs me $900 a month to own the property and it only brings in $800, the house is a non-performing asset, still not a liability. When the house is not rented, it is a non-earning asset, still not a liability.

An asset is anything of value, regardless of it's value and we generally say they are marketable assets, so what ever it is must be available to be turned into cash, regardless of how much cash it may bring. If it is not marketable it isn't a financial asset.

Some assets are not marketable ,they may have an intrinsic value to you but since it can not be converted to cash, it may have little or no value and is more of a possession than an asset. I have a small quartz rock that has no value but since my grandfather and I dug it up together, it has value to me but it isn't on my financial statement.

If I own a house three states away and owe nothing on it, it is an asset, but it sure is a PITA to take care of it, operate it, manage it and maintain it, to me it is a liability from a personal point of view not an accounting point of view. My german shepard is a liability on road trips in the car, but a joy to take as well. My second wife was a liability at times, especially at the end.

Liabilities, financial liabilities are debts owed or circumstances that yield little or no benefit and are obligations. If I receive a notice that someone is suing me for a sum of money, that is a contingent liability, contingent upon them winning a judgment I will owe that amount at which time it becomes a liability. If you enter into any contract to perform any act, you are forming a contingent liability until that act is accomplished as agreed.

Loans made to you are financial obligations and are liabilities. If you own anything that is assessed for taxes, a horse, a goat or a house, you incur a tax liability every day.

Assets minus liabilites equals net worth. If my house is worth $100K and my mortgage on it is $120K, I have a negative net worth, it doesn't change the nature of the house being an asset or the mortgage being a liability. However, if my mortgage is only $70K I would have $30K in my net worth.

So, it depends on how we use and apply asset or liability to what we are talking about, from an accounting or financial point of view or a personal point of view, if we are speaking of circumstances or about what might happen in the future.

BTW, the conversation of expected performance of the asset has gone to your income statement, not your balance sheet, where we talk about assets and liabilities. Next week we will talk about income and expenses and gross and net income or loss. LOL :)