The Way to Wealth - 02 (Accounting Variation)

Hello again... :)

Today we shall talk about the difference between an Asset and a Liability

If you have read "Rich Dad Poor Dad" from Robert Kiyosaki you will understand what I am trying to explain if not, I need you to keep an open mind

First thing you need to understand is the difference between four Accounting Principles

1. Asset

2. Liability

3. Income

4. Expenses

I will start with number 3 and 4 as they are the easiest to understand

Income is simply the money that you generate. Most of you generate that money by working for others (Pay check)

Expenses is simply the bills that you pay (Mortgage, Phone Bill, Cable, Gas, Car, Insurance, trips, gambling etc)

The other two items to understand are Asset & Liability. They are quite simple to understand, but you need to have an open mind about it...

Asset is everything you purchase that generates Money (Income)

Liability is everything that generates bills (Expenses)

Now is your beautiful suburb house an asset or liability? I bet you think it is an Asset... right?? Wrong... It is a liability. You may ask yourself "why?". Well quite simply, you need to ask yourself, does my house generate an income? If it does, then it becomes an asset... Since a house generates expenses, such as interest, heating, grass cutting, snow removal, repairs, etc, then it is a Liability!!

Is a condo that you purchase and rented out an Asset or Liability? To answer the questions, you need to ask it in a different way. Is rent an expense or an income? Since in most cases the rent that you receive from a condo that you own is an income, then it becomes an asset... what about the interest and repairs you will ask... well, they truly are expenses but related to an asset, therefore, part of the expenses generated by an asset... Since the true income is what you earn minus what you pay, then the net becomes your INCOME

Robert Kiyosaki said and I certainly agree with him that in order to be RICH, you need to acquire assets, which in return will generate income, and pay for YOUR EXPENSES.

Hope you like this little lesson. I will continue teaching you a course every now and then in the meantime think of purchasing ASSETS!!!