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Assets are not the same as paid-off items

4 April 2016 | Published by AME

“You don’t own your house, the bank does”. How often have you heard people saying this? From an accounting perspective, this is actually incorrect. For accounting purposes, we don’t look at whether an item has been fully paid off; we look at the concept of control to determine if you have an asset or not.

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So in the case of a house, we need to think about who controls it. Clearly if I am the owner, I do, as I decide whether to sell the house, rent it out, paint it etc. The minute I take transfer of the house, it should be listed as an asset on my personal Balance Sheet.

How I have chosen to fund the house is a separate matter. I may have paid in cash (unlikely!) or taken out a bond (mortgage). If I have taken out a bond, the amount that I have borrowed will be shown on my Balance Sheet as a liability. The value of the house will be shown as an asset. In this way, we are telling the full story.

The same is true for a business buying any asset. If the business exercises control over that item, it is an asset for the business. How the business has funded the asset is a separate matter and will be separately recorded for accounting purposes.

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