by Jack Roviere

Created on: July 19, 2008   Last Updated: September 09, 2008

A friend of mine and her parents have a long-running inside joke between them: whenever the girl does or says anything snippy, her parents will warn her that she ought to treat them better because after all, they are the ones paying her school bills (and they can easily stop.) The girl, sharp enough to deflect such healthy humiliation, always responds: "But dear parents, think of the lovely house I will buy you as a result of my education and future job that you have paid the way for."

It's a cute dialogue and it showcases the differences between assets and liabilities in a meaningful way. The parents' debt for their daughter's education is a liability - it is an obligation that they must pay for due to a past transaction (namely, signing for college loans and paying fees). However, this liability isn't won for nothing. In exchange, the daughter points out that her education is an asset not only to herself but to her parents; the increased earning potential, as well as the house she will (surely) buy her parents, represents a future gain realized from a past transaction (that same signing for the college loans, in a way.)

The general difference between financial assets and liabilities works under the same guidelines: an asset is an unrealized future economic benefit from a transaction and a liability is an economic obligation from a transation.

From here, both assets and liabilities can be defined into more useful subcategories based on their generalized time periods. Since both describe *future* benefits or obligations, this time factor is quite important.

"Current" assets are those that are liquid - which means it is easily convertible to the economic benefit required without too much loss of value - within one year (the typical fiscal year for a company, usually, or less). Cash, of course, is the most liquid and current asset. As long as you have cash, you can buy anything from anyone that accepts it, no ifs, ands or buts. Cash as an asset generally includes "cash-equivalent" accounts, so checking accounts are considered just as good and liquid as cash. Next up in current assets are some short-term investments...stocks bought for the express purpose of being resold within the year obviously can be counted on as an economic benefit within the year. Receivables (generally from transactions regarding credit) also count as current assets, with the potential for bad debt (e.g., someone not paying their credit card and running off to a third world country to avoid

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