An asset is something you own and a liability is something you owe, so how can a liability ever be turned into a asset or profit?
Perhaps we should start by reviewing the following equations:
- More assets than liabilities = profit
- More liabilities than assets = loss
- More income than expenses = profit
- More expenses than income = loss
All of the above equations are correct, however these terms can cause us problems every day. Assets versus liabilities, income versus expenses, debits and credits, profit, loss, surplus, deficits… So many terms to understand and work with and just when you think all is good, someone says that liabilities can be beneficial, or perhaps even a profit?
Most managers and Board members would be dumbfounded at the thought, thinking the person making the statement must be crazy. But it is true. A liability can be often be turned into a profit. Not in all cases of course, but some. How, you ask? It’s all about timing, being fastidious and understanding what your accounts are telling you…
For example, you could start by transferring the liability to the Income Statement or by reversing the liability out of the accounts, and the result would be an increase in profit. An example would be the long service provisions provided for employees. If a staff member leaves before being eligible to take their long service leave, then that which was a liability, then becomes an asset to the organisation in the form of profit after the liability was reversed out of the accounts.
Going back to reflect on expenses is also important. By checking figures from the previous month, you may find that you accounted for a bill or liability to cost more than it did. This difference in expense can then become a profit in your next report or statement.
If you need assistance with casting a fresh look over your accounts or learning to think outside of the accounting “box”, contact our Consulting team on:
Phone: 08 8444 9700
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