by Renae Richardson

Created on: June 23, 2009

Many shy away from defining the complexities of financial instruments. Those whom assume the responsibility of such a task hide its simplicity in a corporate lingo which requires the presence of an interpreter for those less familiar with the concepts.

Many are left to feel as if they have fell down a rabbit hole and each prattle of the tongue only serves to bring about much confusion as a result things truly become curioser and curioser

Not here!

Below are the terms made simple!

As individuals we all have assets. Our assets are the things we have going for us. These are the attributes or possessions that make us more attractive to the opposite gender, employers, or college boards.

Our goal is to improve our assets that we may attract the things that we want.

The same principle holds for finance.

Financial assets are the things that businesses have going for them which improves its value.

*The more valuable a company the more investors, consumers, and capital it attracts.

Why is that?

Investors seek to make money. Investors will get more money from companies with greater assets especially those more liquid (can be easily converted to cash). More investors translate to greater investment capital (money). The more money a business has coming in the more a business can do to improve its systems and its products and its services. Consumers are drawn to the businesses that best meet their needs.

Assets include

Securities (investments) Account receivables (money to be received from consumer accounts) Inventory (stock items) Office equipment Real estate (property)

In a person liabilities are the attributes which take away from our value. Our liabilities are the things that hinder us.

In business a, Liability is an obligation that legally binds an individual or company to settle a debt (GE Commercial Finance, n.p.)

The more liability (debt) a company incurs the more unappealing it is to investors and to lenders.

Liabilities are often the costs of doing business.

*Every business takes on a fair amount of liability.

This is usually the case unless the entrepreneur has assumed a fair amount of capital from other ventures and chooses to assume complete risk. Even those who do have the cash assume some liability so as not to absorb the entire risk.

Liabilities can include

Loans

Account payables (The accounts your company has with other vendors)

Taxes

Wages (to be paid to employees)

Accrued expenses

Deferred revenues

What is the major difference between a financial asset and a liability?

Financial assets add to your net worth

Liabilities diminish your net worth.

What is your Net worth?

Your net worth is your value. This is determined by the amount of assets that one has in relation to incurred liabilities.

Why is your net worth important?

Net worth can be used to determine creditworthiness because it gives a snapshot of the company's investment history also called owners equity, shareholder equity, or net assets.

Not to mention it improves positioning for going public if company requires additional capital to spur larger projects or investment opportunities

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