Assets and Liabilities

One of the most important aspects of understanding the value of a property is to analyze the stability of the rental income stream. To do so, a real estate manager often needs to review a tenant’s assets and liabilities.

Like income and expenses, assets and liabilities are a basic division in accounting.

• An asset is an economic resource expected to produce future benefits.
• A liability is a debt or obligation.

In general, income of various kinds is an asset, and expenses are liabilities. This means that accounts receivable are assets, and accounts payable are liabilities. An asset increases the value of the property, and a liability decreases its value. Apartment buildings, office buildings, and shopping centers also are assets, since they can provide income either through rentals or sale of the property. Fixed assets are properties, goods, or other things of value that cannot be readily sold or otherwise converted on short notice at their true and fair value. They include tangible assets of a long-term nature such as land, buildings, machinery, and equipment that are not intended for resale within the regular operation of a business.

In accounting, assets and liabilities are separated into short-term (or current) and long-term assets.

• Short-term assets are expected to be converted to cash or to be used up during the year.
• Long-term assets are resources that are held for any period longer than one year. Real estate is a prime example of a long-term asset.
• Current liabilities are due within the coming year.
• Long-term liabilities are those that will be paid off over some extended time span. A mortgage is a good example of a long-term liability in real estate.