Assets and Liabilities

Your net worth is calculated by subtracting the total value of your liabilities from the total value of your assets.

Assets may either be tangible or intangible in nature and liabilities are debts or committed payments that are due to third parties. For example, whilst your house is an asset, the mortgage loan on your home is a liability.

Assets can be classified in many ways, but here are some useful concepts.

Immovable assets refer to assets that are physically fixed and cannot be moved. This type of asset refers to land, buildings or any permanent structure. Conversely, moveable assets can be transported and includes items such as motor vehicles, appliances, clothes and furniture.

Another classification that can be considered is “liquid assets” which are assets that can readily be converted into cash. Examples of these types of assets include saving accounts and shares. Liquid assets are assets that cannot easily be converted into cash either because you are contractually unable to do so, or it may take a lengthy period of time to do so. The best example is the sale of a home; it could take many months before a buyer is secured, the transfer process is completed and the proceeds of the sale is received.

Similarly, liabilities can also be categorised in different ways. A liability is “secured” if it is backed by an asset. For example, a home loan is backed by a physical property. If the borrower fails to meet the repayment obligations the lender may, after following proper legal steps, sell the asset to recoup the outstanding debt.

Conversely, “unsecured” debt is not backed by an asset. Examples of unsecured lending include personal loans, overdraft and credit card facilities. Lenders may have a more difficult time recouping these debts and it is for this reason that unsecured debt is considered to be higher risk compared to secured lending.