Every business organization needs to buy a tangible asset for their business. It can be anything, right from a real estate, equipment or an automobile.
Purchasing and leasing are merely different methods to finance the asset. Because of the fact that leasing and purchasing have their own benefits and drawbacks, you need to take into consideration plenty of factors in order to come up with a right decision.
One cannot say with full authority, which is better, leasing or purchasing, because everyone’s requirements are not the same. Often, it depends on things like overall cost, long-term value of the asset, cash-flow restrictions and tax implications.
In some cases, supply vendors add some sort of incentives to lease programs so that their product inventory moves.
Benefits and Drawbacks
When it comes to creating and acquiring true assets, you need to have a proper understanding of the benefits and drawbacks of buying vs. leasing.
Ownership: When you buy an asset, you become the owner and therefore do not need to worry about the third party obligations. You can modify, sell or do whatever you like with the asset.
Lease: Talking about lease, it is lot more restrictive in nature. You are going to find usage limitations in this scenario. In addition, there is also going to be contractual obligations that you need to maintain especially with regard to lease payments.
Cash flow and investment decisions: If you are all set to buy an asset, you need to make a down payment or buy the asset straightaway by paying the complete amount.
There is no need of upfront money in leases and you only pay for the part of the asset that you are going to use.
Obsolescence: A lease is an ideal option if there is a possibility that your asset will become obsolete in a short time frame. In this scenario, it is advisable that you opt for a shorter-term lease. After all, you can always renew it.
In some cases, buying office equipment is not the way to go especially when there is a possibility of maintenance and repair work. Rates for maintenance and repair of office equipment can be quite high and it can have a negative impact on your overall budget.
Difference Between an Asset and a Liability
Lots of individuals are of the opinion that their house is the biggest asset they have. After all they have invested quite a bit on it. In majority of cases, second position goes to car.
But the question is: Are house and car really assets?
Unfortunately, house and car does not come under the category of assets. Generally speaking, they are liabilities, as they need your money on a regular basis.
For example, it is worthwhile pointing out that a car has lots of extra costs gas, repairs, taxes and so on. On the other hand, house requires money for repairs, energy and lot more. If you have any intention of becoming rich, you need to have an idea of what is an asset and what is a liability.
Money Into Your Wallet
One of the most striking features of asset is that it puts money into your wallet. In other words, asset should generate revenue for you regularly.
The conventional asset definition is anything that you own has some sort of value attached. More importantly, you can easily turn them into money if situation arise.
Do a close inspection of your room. Is there anything that comes under the category of valuable? You are going to find plenty in there, including cell phone, TV, computer? In technical terms, assets also include the bank accounts balance that is running in your name.
But everything is not that straightforward. While things that are there in your room come under the category of an asset as you can easily sell them but you cannot call it as an asset until it is sold.
Why? Because it is not putting any money into your wallet until you sell them. And once you sell it, you cannot term it as an asset as you are no longer owner of it.
Same can be said of the cash that is there in your wallet, as it is not reproducing itself. But there are locations where cash can reproduces itself, especially when you invest it in the assets that can provide you with a regular source of income.
Money Out of Your Wallet
Liabilities are completely different from assets. One of the main features of liabilities is that they take money out of your wallet.
As a matter of fact, plenty of above-mentioned things- such as computer or a TV in your room that are widely been regarded as “assets”-are more or less liabilities at present, because it took cash out of your wallet in order to buy them.
Irony is that lots of them, when converted to cash are going to give you much less money than the original amount. Therefore just if your house or car value go up in comparison to the original price, then only you can say that it is an asset.
Asset and value go hand in hand. On the other hand, a liability can be termed as the negative point of this value. It includes the debt amount that you have incurred because of buying the asset.
There are lots of different assets types, including, cash, prepaid expenses, inventories and accounts receivable. Other assets forms can be categorized as non-fixed assets. These kinds of assets consist of equipment and property.
Talking in terms of liabilities, it encompasses payable accounts; guidelines for warranties, financial liabilities like cooperate bonds and assets for unearned revenue.
A balance sheet can turn out to be quite useful when it comes to updating assets and liabilities. A balance sheet gives you an overview of the financial balances of your company.
Lots of business organizations possess assets that come under the category of investment. With these assets, you are not going to get cash immediately.