Final answer:
Personal bank deposits are an asset and loans are a liability, whereas for banks, this characterization is reversed; deposits are a liability and loans are an asset. This is due to the differing perspectives and roles of the individual and the bank in the financial system.
Step-by-step explanation:
The difference between how one would characterize bank deposits and loans as assets and liabilities on a personal balance sheet versus how a bank does so on its balance sheet primarily lies in the respective roles each party plays. For an individual, bank deposits are viewed as an asset because they represent money that the person can use or withdraw at any time. In contrast, loans that an individual takes out are considered liabilities because these are obligations that the person must repay in the future.
On the other hand, for a bank, the characterization is the opposite. Deposits made by customers are a liability for the bank because the bank owes this money back to its customers. Conversely, loans issued by a bank are its assets because they represent future income streams from the interest and principal that borrowers will repay over time. This illustrates an asset-liability time mismatch in banking, where customers can withdraw liabilities (deposits) in the short term, while it takes longer for the bank to recuperate its assets through loan repayments. Understanding these differences is essential for grasping the basic functioning of balance sheets and the financial positions of individuals and banks.