how are financial assets created? we may illustrate this process using a rudimentary financial system in which there are only two economic units: a household and a business firm. assume that this financial systems closed, so no external transaction with other units are possible. each unit holds certain assets accumulated over, the years as a result of it's saving out of current income. the household for example, may have accumulated furniture an automobile, clothes and other items needed to provide entertainment food, shelter and transportation. the business firm holds inventories of goods to be sold raw materials machinery and equipment and other assets required to product and sell it to the public. the financial position of these two economic units is presented in the form of balance sheets. a balance sheet of course is a financial statement prepaid as of a certain data, showing a particular units assets liabilities and net worth. net worth represents the accumulated sources of funds that an economic unit drawn upon to acquire the assets it now holds the net worth account reflects total saving accumulated over time by each economic unit. a balance sheet must always balance. total assets must equal total liabilities plus net worth.
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