When you buy property that you must borrow to pay for, such as a house or a car, the property instantly becomes your asset, and the loan you took out to pay for it becomes a liability. Most people don't calculate balance sheets for themselves the way most businesses do, but if they did, the property would be listed with all other assets, and the loan would be listed with all other debts.
Definition of an Asset
In this context, an asset is defined as property that is owned and has value, and can be liquidated to pay debts and other expenses if necessary. In most cases today, if you take out a loan to purchase a car or house, if you liquidate that property, you must apply the proceeds of the sale first to the satisfaction of the debt. If you borrow for smaller purchases, such as using a credit card to buy a refrigerator, the limitations on liquidating the asset are less restrictive or nonexistent; however, you much continue to pay the credit card bills.
Definition of a Liability
A liability is a legal debt or obligation. In most cases, liabilities are documented by contracts that spell out all the details of the debt, how it is to be satisfied, and what steps the creditor can take if the borrower doesn't make scheduled payments on time. In the case of large items like houses and vehicles, creditors are often empowered to repossess them in the event the borrower defaults. For smaller items, such as debt incurred on a credit card, the creditor generally cannot repossess the items purchased, but can sue the borrower.
Asset Appreciation and Debt Satisfaction
Some items purchased with borrowed money, most notably real estate, gain value over time. Others, like automobiles, nearly always lose value. If a borrower defaults on a loan that is secured by real estate or a vehicle or some other property, the creditor may repossess the property and sell it to recover the money due. If the creditor cannot recover the outstanding balance of the loan, in many states it may seek satisfaction from the borrower for the shortfall, called a deficiency judgment. Some states limit a creditor's ability to seek a deficiency judgment.
The simplest way to calculate net worth is to add the value of all assets and subtract from that amount your total debts, or liabilities. While the total of the liabilities should be easily calculable from the loan documentation, calculating the value of assets can be more difficult. For instance, houses and cars, which are generally the largest purchases most families make, rarely keep the same value for which they were originally purchased. Depending on the reason for calculating net worth, it may be appropriate to engage the services of a professional appraiser to determine the value of such items.