🔎 Why are loans an asset to a bank?

🙋 Why are loans an asset to a bank?

✔ A loan is a liability for the borrower because they owe money and have to pay it back.

In contrast, a loan is an asset to the lender because it is a promise that they will receive money in the future. Anything which causes you to receive something valuable in the future is an asset.

Intuitively, an asset is anything that is valuable, but the textbook defines an asset as “a financial claim or piece of property that is a store of value.”

A financial claim just means that someone or some company will need to transfer something valuable to you in the future. Therefore, a loan is a financial claim. Because it is a financial claim, it is an asset!

The above is how an economist would see it. An accountant would simply think of a loan as a form of receivable:

Receivable, noun:
amounts owed to a business, regarded as assets.

Basically, anything that is owed to you is regarded as an asset.

A visual depiction is provided below 👇

Loans are an asset to the bank because they are financial claims that cause money to flow 💸 from Individuals and Businesses to the Bank.