Assets, Liabilities, and What?

OK - enough of the chit chat. It's time to talk about some cold, hard, assets, baby! That's right. We all love em - but few understand em. I decided to include Liabilities and Equity (Equi wha?) in this little round table discussion of ours, because let's face it - very few assets in life are EVER acquired without liabilities and equity attached. I'm thinkin the BEST way to explain Assets, Liabilities, and Equity would be to give a little example - something we're ALL really familiar with; buying a high-powered sniper rifle for those weekends when 4-wheeling just doesn't cut it. Oh, YA baby!

Let's say that you have your eye on this thing, and it's only $10,000. Problem? Not really, except you don't HAVE $10k and The Mrs. isn't about to let you cash in the 401k (more on those later). In all your brilliance you decide that Bob (the banker) would be sympathetic to your plight. You decide to approach him in all your humility and plead your case - because out of all people, Bob would understand. Bob IS sympathetic, but not to the tune of $10,000 sympathetic - more like $7,500 sympathetic. All is LOST! Oh, the humanity! You don't want to settle for that other "piece" the store has behind the counter - you want the one with the 4 ft. scope, and the cool tripod on the front. Just at the very moment when you're about to consign yourself to the trenches of misery (filled with guys who can't buy cool stuff), you realize that you saved 10% of your income ever since you were a child - and your savings Shoooould be right around $2,500 by now. Success! You're mom always told you to save - and NOW it's paying off! She's Brilliant! You TAKE the $7,500 unsecured, high interest rate loan from Bob (more on those later) and run home. You combine the two sacks of money (your $2,500 and the banks $7,500) and head off to the store. As you return home, you now have an aire of confidence, like a king entering his royal palace - for not many men in the kingdom can plink "stuff" from a mile away. Life never tasted SO good.

OK - let's take a look at where your finances are. You just bought a gun that cost $10,000 - THIS is your Asset. What's your liability? Why, the $7,500 of course. You still OWE that to the bank - that's pretty much the definition of a Liability - You're still LIABLE for it. So, now that we've established our Asset and Liability, what's our Equity? That's EASY, it's just the $2,500 we put down on the gun. Now let's say we find it in our heart to pay the bank back a little (because we're cool like that and we would NEVER want America to end up in a big huge recession) so we cut the bank a check for $500. Now we only owe $7,000 and our equity in the gun goes up to $3,000. The asset still stays at $10,000 - because that's what we bought it for.

Pretty Easy? I thought so. Now - go get that gun! Just invite me along when you start plinkin stuff.

Wha?!

Wha?! You hate accounting? If you're one of billions that think it was created as a substitute for waterboarding and somehow made its way into our public school system, this blog is for you. Ima gona make accounting and 'numbers' so cool to learn about that you'll actually become more popular just by following my posts. Before you know it, you'll be asking your friends what program they use to keep track of their loan amortizations. I can hardly wait!