Income and expenses are money that moves during a period. Assets and liabilities are what is owned and owed at one moment. To sort an item, ask whether it is a movement or a balance.
This lesson opens the consumer mathematics and financial planning section. The next step is to put these labels into a statement, in building a cash-flow statement from supplied data.
What are the four labels?
Each label has a simple test.
- Income: money received in the period.
- Expense: money spent in the period.
- Asset: something owned that has value now.
- Liability: an amount owed now.
Worked example: Aina’s items
Aina is an invented student. She lists her items.
| Item | Label | Reason |
|---|---|---|
| Salary of RM2 800 each month | Income | Received in the period |
| Tutoring earnings of RM400 each month | Income | Received in the period |
| Savings account balance RM6 500 | Asset | Owned, has value |
| Laptop valued at RM2 800 | Asset | Owned, has value |
| Motorcycle valued at RM4 200 | Asset | Owned, has value |
| Motorcycle loan balance RM2 600 | Liability | Owed now |
| Credit card balance RM400 | Liability | Owed now |
| Loan payment of RM350 this month | Expense (outflow) | Paid in the period |
Total assets = 6 500 + 2 800 + 4 200 = RM13 500. Total liabilities = 2 600 + 400 = RM3 000.
Net worth = 13 500 − 3 000 = RM10 500.
The mistake that mixes balance and payment
A common slip is to label the RM350 payment as a liability because it is “for the loan”. The payment is money leaving this month, so it is an outflow.
The liability is the balance still owed, RM2 600. A quick test is to ask “at one moment or over a month?” A balance is at one moment.
Check yourself
Label each item: (a) monthly allowance of RM400, (b) remaining loan of RM1 800, (c) a payment of RM150 towards that loan, (d) a bicycle valued at RM500.
Answer
(a) Income, received in the period.
(b) Liability, an amount owed now.
(c) Expense (outflow), paid in the period.
(d) Asset, owned and valued.
Net worth from these items = 500 − 1 800 = −RM1 300, since the liability is larger than the asset.
What to study next
Put the movement items into a statement in building a cash-flow statement from supplied data. Then check your labels with the practice set.
If you want a teacher to question your labels one by one, see online one-to-one Mathematics tuition.