Assets

Know the types of assets

1.      Current assets

2.      Fixed assets

Current assets

In accounting, a current asset is an asset which can either be converted to cash or used to pay current liabilities within 12 months. Typical current assets include cash, cash equivalents, short-term investments, accounts receivable, stock inventory and the portion of prepaid liabilities which will be paid within a year.

On a balance sheet, assets will typically be classified into current assets and long-term assets.

The current ratio is calculated by dividing total current assets by total current liabilities. It is frequently used as an indicator of a company's liquidity, its ability to meet short-term obligations.

Current assets have a life span of one year or less, meaning they can be converted easily into cash. Such assets classes are, cash and cash equivalents, accounts receivable and inventory. Cash, the most fundamental of current assets, also includes non-restricted bank accounts and checks.

Cash equivalents are very safe assets that can be are readily converted into cash such as US Treasuries. Accounts receivable consists of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit, which then are held in this account until they are paid off by the clients.

Lastly, inventory represents the raw materials, work-in-progress goods and the company's finished goods. Depending on the company, the exact makeup of the inventory account will differ. A manufacturing firm will carry a large amount of raw materials, while a retail firm caries none. The makeup of a retailers inventory typically consists of goods purchased from manufacturers and wholesalers.

Current Assets are those assets that will be converted into cash within one year, and assets that will be used up in the operation of a business within one year. Some examples of current assets are inventory and supplies.

Non-current assets

             Non-current assets are those assets that are not turned into cash easily, expected to be turned into cash within a year and/or have a life-span of over a year. They can refer to tangible assets such as machinery, computers, buildings and land.

            Non-current assets also can be intangible assets, such as goodwill, patents or copyright. While these assets are not physical in nature, they are often the resources that can make or break a company - the value of a brand name, for instance, should not be underestimated.

Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.

Definition of Current Assets

1. A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.

2. In personal finance, current assets are all assets that a person can readily convert to cash to pay outstanding debts and cover liabilities without having to sell fixed assets.

             In the United Kingdom, current assets are also known as current accounts.

Explains Current Assets

 

1. Current assets are important to businesses because they are the assets that are used to fund day-to-day operations and pay ongoing expenses. Depending on the nature of the business, current assets can range from barrels of crude oil, to baked goods, to foreign currency.

2. In personal finance, current assets include cash on hand and in the bank, and marketable securities that are not tied up in long-term investments. In other words, current assets are anything of value that is highly liquid.

Current Assets on the Balance Sheet

The first thing listed under the asset column on the balance sheet is something called current assets. This is where companies list all of the stuff that can be converted into cash in a short period of time, usually a year or less. Because these assets are easily turned into cash, they are sometimes referred to as liquid. Current assets normally consist of cash and cash equivalents, short-term investments, and a few items. Let's take a moment to examine each.

           Assets are generally defined as things a company owns, which are expected to provide future benefits. There are two main types of assets: current assets and noncurrent assets. Within these two categories, there are numerous subcategories, or line items.

          Current assets are things a business owns that are likely to be used up or converted into cash within one business cycle--usually defined as one year. The most common line items in this category are cash and cash equivalents, short-term investments, accounts receivable, inventories, and other various current assets.

Cash and Cash Equivalents: This line item doesn't necessarily refer to actual bills sitting in a cash register or vault. Generally, cash is held in low-risk, highly liquid investments such as money market funds. These holdings can be liquidated quickly with little or no price risk. This is considered money that can be used for any purpose the company wants.

Short-Term Investments: This represents money invested in bonds or other securities that have less than one year to maturity and earn a higher rate of return than cash. These investments may take a little more effort to sell, but in most cases, investors can lump them with cash to figure out how much money a firm has on hand to meet its immediate needs.

Accounts Receivable: Think of receivables as bills that a company sends its customers for goods or services it has provided but for which the customer has not yet paid but is expected to pay within the next year. In other words, these are sales recorded on the income statements that haven’t been paid for yet with cash. Generally, accounts receivable are shown as a net amount of what a company expects to ultimately collect, because some customers are likely not to pay. The amount of receivables a company thinks it won't collect is typically known as an allowance for doubtful accounts. Not only do additions to the allowance for doubtful accounts decrease the amount of accounts receivable, but they also increase a company's expenses--known as bad debt expense.

Keep an eye on accounts receivable in relation to a company's sales. If accounts receivable are growing much faster than sales, it generally means a company isn't doing an ideal job collecting the money it is owed. This could potentially be a sign of trouble because the company may be offering looser credit terms to increase its sales, but it may have difficulty ultimately collecting the cash it's owed. Conversely, if accounts receivable are growing much slower than sales, the firm's credit terms may be too stringent, at the expense of sales.

Inventories: There are many different types of inventories, including raw materials, partially finished products, and finished products that are waiting to be sold. This line item is especially important to watch in manufacturing and retail firms, which are saddled with large amounts of physical inventory.

The value of inventories shown on a company's balance sheet should be taken with a grain of salt because of the way inventories are accounted for. Similar to accounts receivable, changes in inventories are generally related to a company's sales, or more specifically, the gross profit--sales price minus the cost of the inventory sold--it makes from each sale. If inventory levels are growing much faster than a company's sales, it may be making or buying more goods than it can sell. That may force the company to lower its prices, which results in lower profits for each item sold and lower profitability for the company. In some cases, it may have to reduce prices to levels below the value of the inventory itself, resulting in losses.

Additionally, inventories tie up capital. The cash that was used to create inventory can't be used for anything else until it's sold. Thus, another important thing for investors to monitor is how fast a company is able to sell its inventory.

Other Current Assets: While there are too many to list here, this category includes any other assets the firm may have that are expected to turn into cash within the next year. However, some current assets will not turn into cash, the most common of which are known as prepaid expenses, say Harley-Davidson  buys and pays up-front for an insurance policy for the coming year. Accounting rules say the company should record the entire payment as a prepaid expense and asset as opposed to a normal expense on the income statement because it represents something of future worth to the company--a full year's worth of insurance coverage. As the year goes on, the value of the asset will decrease--less time remaining on the policy--and the amount of the decrease is recorded as an expense, a process known as amortization. Keep in mind that a company's prepaid expenses--which belong to a broader category known as capitalized costs--represent cash that was paid up-front and will turn into expenses instead of cash within the next year.

Fixed Assets:

Fixed assets, also known as tangible assets or property, plant, and equipment, is a term used in accounting for assets and property that cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. In most cases, only tangible assets are referred to as fixed. International Accounting Standard 16 defines Fixed Assets as assets whose future economic benefit is probable to flow into the entity, whose cost can be measured reliably.

Moreover, a fixed non-current asset can also be defined as an asset not directly sold to a firm's consumers end-users. As an example, a baking firm's current assets would be its inventory in this case, flour, yeast, etc., While these non-current assets have value, they are not directly sold to consumers and cannot be easily converted to cash.

These are items of value that the organization has bought and will use for an extended period of time; fixed assets normally include items such as land and buildings, motor vehicles, furniture, office equipment, computers, fixtures and fittings, and plant and machinery. These often receive favorable tax treatment depreciation allowance over short-term assets.

It is pertinent to note that the cost of a fixed asset is its purchase price, including import duties and other deductible trade discounts and rebates. In addition, cost attributable to bringing and installing the asset in its needed location and the initial estimate of dismantling and removing the item if they are eventually no longer needed on the location.

The primary objective of a business entity is to make profit and increase the wealth of its owners. In the attainment of this objective it is required that the management will exercise due care and diligence in applying the basic accounting concept of “Matching Concept”. Matching concept is simply matching the expenses of a period against the revenues of the same period.

The use of assets in the generation of revenue is usually more than a year, i.e. long term. It is therefore obligatory that in order to accurately determine the net income or profit for a period depreciation is charged on the total value of asset that contributed to the revenue for the period in consideration and charge against the same revenue of the same period. This is essential in the prudent reporting of the net revenue for the entity in the period.

Net book value of an asset is basically the difference between the historical cost of that asset and its associated depreciation. From the foregoing, it is apparent that in order to report a true and fair position of the financial jurisprudence of an entity it is relatable to record and report the value of fixed assets at its net book value. Apart from the fact that it is enshrined in Standard Accounting Statement 3 and IAS 16 that value of asset should be carried at the net book value, it is the best way of consciously presenting the value of assets to the owners of the business and potential investor.

 

Definition of Fixed Asset

 

A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time. 

          Fixed assets are sometimes collectively referred to as plant

Explains Fixed Asset

 

Buildings, real estate, equipment and furniture are good examples of fixed assets. 
Generally, intangible long-term assets such as trademarks and patents are not categorized as fixed assets but are more specifically referred to as "fixed intangible assets".

Accounting for Fixed Assets

This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of the General Instructions contained in part a of the Annexure to the Notification.

  

Definition and Explanation

Fixed assets, also known as Property, Plant and Equipment, are tangible assets held by an entity for the production or supply of goods and services, for rentals to others, or for administrative purposes.

These assets are expected to be used for more than one accounting period. Fixed assets are generally not considered to be a liquid form of assets unlike current assets. Examples of common types of fixed assets include buildings, land, furniture and fixtures, machines and vehicles.

The term Fixed Asset is generally used to describe tangible fixed assets. This means that they have a physical substance unlike intangible assets which have no physical existence such as copyright and trademarks.

Fixed assets are not held for resale but for the production, supply, rental or administrative purposes. Assets that held for resale must be accounted for as inventory rather than fixed asset. If a company is in the business of selling cars, it must not account for cars held for resale as fixed assets but instead as inventory assets. However, any vehicles other than those held for the purpose of resale may be classified as fixed assets such as delivery trucks and employee cars.

Fixed assets are normally expected to be used for more than one accounting period which is why they are part of Non-Current Assets of the entity. Economic benefits from fixed assets are therefore derived in the long term.

In order for fixed assets to be recognized in the financial statements of an entity, the basic criteria for the recognition of assets laid down in the IASB Framework must be met.

1.      The inflow of economic benefits to entity is probable.

2.      The cost/value can be measured reliably.

Definition

An asset that is not consumed or sold during the normal course of business, such as land, buildings, equipment, machinery, vehicles, leasehold improvements, and other such items. Fixed assets enable their owner to carry on its operations. In accounting, fixed does not necessarily mean immovable; any asset expected to last, or be in use for, more than one year is considered a fixed asset. On a balance sheet, these assets are shown at their book value.

How to account for fixed asset

Fixed asset is a property of a business that is used for production of goods and services. It is classified as intangible, tangible, and investment. Intangible fixed assets are non-physical properties such as a patent, copyright, and goodwill. Tangible assets include plant, equipment, land and building. Accounting for fixed assets involves costs, useful life, residual value, depreciation and amortization.