Originally the word ‘wealth’ was derived from the Old English word ‘weal’ which denoted the possession of great qualities. This eventually led to the term being used to indicate ‘well being’.
In the hustle and bustle of modern life, in a world that is more and more commercially driven, the well being of a person is particularly dependent upon their resources. Since Western modern societies have shifted away from being predominantly agriculturally based, the focus of valuable resources for the average person is quite firmly centered on the particular financial resources a person may have at their disposal.
Often the term ‘asset’ is associated with the serious finance of corporations, and particularly frequently in an accounting context. Quite simply, however, an asset is anything that a person may possess within their control that is able to be readily converted into cash.
Assets come in various forms and can include anything from actual cash, to balances in a bank account, stocks and bonds, possessions, buildings and land, equipment, and even extend to what are known as ‘intangible assets’. The latter are able to be converted into cash but are unable to be physically handled because they are in the form of a right or entitlement. Such things as a patent or a copyright, or the goodwill of a business may be termed as an intangible asset. Many businesses choose to protect their assets through a business life insurance policy, enabling them to protect shares, key people within the company or their employees.
Of course, as reluctant as most of us are to undertake a lengthy study of accounting and economic theory, it is interesting to note that all of us engage in some form of accounting analysis each day.
Every day we participate in an economy where we pay others for the privilege of consuming goods or services. The ability to pay for these valuables stems from the assets that we already have control over, or assets that we create by receiving payment ourselves.
This ability or purchasing power to pay for things that we need is entirely dependent on the flow of ‘value’ or money. However, just like any dam full of water, if it isn’t topped up it will eventually run dry….
So herein lays an extremely important issue.
Any discussion of assets necessarily includes the recognition of what are known as ‘liabilities’ and these include the debts or financial obligations that a person owes to others already, or those that they will owe at a time in the future.
Given that an asset is something that can be converted into cash, if a person were to convert all of their assets into cash and then repay all of their debts, bills or ‘liabilities’, then the excess balance would be what is known as financial equity or ownership.
If, of course, the result is that there are liabilities left outstanding, then we are presented with a person who has negative equity and is really one who, without financial recovery, is living on borrowed time before the inevitable conclusion is drawn that creditors are unable to be paid.
This condition has a number of consequences, the most serious of which may be in the form of bankruptcy, which is a formal and legal declaration that a person’s creditors are unable to be paid. This may lead to restrictions being imposed on a person that restrain them from the full participation in economic life that other people enjoy. Concessions often need to be made, such as giving up smoking; worthy of noting is that non-smokers enjoy much lower premiums on life insurance, whereas a smoker’s life insurance premiums are often up to 50-60% more expensive than a non-smoker’s. Clearly, this demonstrates the need for sound asset management.
