Difference between Assets and Liabilities in Banking

Key Difference: An asset is anything that can be utilized to make more money. A liability is an obligation on which money has to be paid. In terms of banking, an asset is anything on which one earns an interest, whereas a liability is anything on which one has to pay interest.

Banking, investments, debt, accounting, etc. are all confusing words and even more confusing concepts. Which is why, it is not surprising that many people have trouble following these concepts. Not to mention that there are conflicting and confusing terms and concepts like Assets and Liabilities, that really tend to give people trouble.

Assets and Liabilities are two terms that are often used in the context of accounting. They denote the way that resources are categorized, either as assets or liabilities. In layman’s terms, assets are good, liabilities are bad. However, in reality things are never that black and white. Assets are what define a business and primarily the profitability of the business. Still, liabilities can be a great source of income for the company, if utilized properly. Liabilities only become a concern, when they outnumber assets, as this indicated that the business is making a loss and will not be able to continue for long. As long the assets outnumber liabilities, the company or bank is doing well.

In general terms, an asset is anything that can be utilized to make more money. Cash, inventory, accounts receivable, land, buildings, equipment, etc. are all things that count as assets. A liability, on the other hand, is an obligation. These are the things on which money has to be paid, either immediately or in the long run. Hence, cash payable, services owed, etc. are all part of liabilities. As assets define the money coming in, while liabilities define the money going out, it is better to have more assets than liabilities. Any business, bank or otherwise that has more liabilities than assets is probably not doing well financially.

In general terms, an asset is anything that can be utilized to make more money. Cash, inventory, accounts receivable, land, buildings, equipment, etc. are all things that count as assets. A liability, on the other hand, is an obligation. These are the things on which money has to be paid, either immediately or in the long run. Hence, cash payable, services owed, etc. are all part of liabilities. As assets define the money coming in, while liabilities define the money going out, it is better to have more assets than liabilities. Any business, bank or otherwise that has more liabilities than assets is probably not doing well financially.

In terms of banking, an asset is anything on which one earns an interest, whereas a liability is anything on which one has to pay interest. For banks themselves, assets are loans, securities portfolios, on which they earn interest. On the other hand, liabilities are things such as deposits on which the bank has to pay interest.

Following the original rule, money coming in equals assets, whereas money going out equals to liabilities. Keeping that in mind, for a banking customer, the roles of assets and liabilities are reversed. Here, the assets would be bank deposits and investments on which the person would earn money. Liabilities would be loans, or fees which the person would have to pay the bank.

Comparison between Assets and Liabilities in Banking:

 

Assets

Liabilities

Definition (Oxford Dictionaries)

An item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

A thing for which someone is responsible, especially an amount of money owed.

Description

Anything that earns money

Anything that takes money out of the pocket

In banking

An asset is anything on which one earns an interest

A liability is anything on which one has to pay interest.

For banks

Assets are loans, securities portfolios, etc.

Liabilities are deposits, etc.

For bank customers

Assets are deposits and other investments.

Liabilities are loans, mortgage, securities portfolios, etc.

Reference: Oxford Dictionaries (Assets and Liabilities), Investopedia, Chron
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