There are primarily 4 types of transactions that take place in any business.
1. Incurring of Expenses
Examples: Electricity Bill, Rent, Stationery, etc.
2. Earning of Income
For example, through sales, commission, etc.
3. Creation of a Liability
Examples: Capital, Creditors, 8% Bank Loan, etc.
4. Purchasing an Asset
Examples: Land & Building, Plant & Machinery, etc.
Incomes and Expenses are pretty self-explanatory. Hence, we will focus our attention on the two new words of English we learnt today: Liability and Asset.
First, let us take Liability.
Just like Journal is synonymous to ‘Diary’, Liability is simply another word for ‘Responsibility’. Responsibility, here, refers to the repayment obligations (commitments) of any business towards its sources of funds, be it loan from banks or capital i.e., personal savings invested in business.
Put simply, Liability is the actual word used in the Balance Sheet, to represent Sources of Funds who have to be repaid in the future.
And, not so surprisingly, Asset is the actual word used in the Balance Sheet, to represent the Uses of Funds through which the business aims to make profit.
Robert Kiyosaki, the author of Rich Dad Poor Dad, says,
“A liability is anything that will take money out of my pocket.”
And,
“An asset is anything that will put money in my pocket.”
Aside from these simple explanations, there are formal definitions for the 4 terms we discussed just now (viz, Income, Expense, Liability and Asset). If you wish, check them out from the pdf in the reference section.
Either way, we’ll be discussing them in detail in the coming snippets.
Reference
NCERT Class 11 Accountancy. Topics 1.5.3, 1.5.4, 1.5.7 and 1.5.8
https://www.ncert.nic.in/ncerts/l/keac101.pdf
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