Asset Accounts Definition
Asset Accounts are used to identify the exact usage of stakeholder’s capital (Debt + Equity). They are reported at book values and are depreciated/amortized in the case of fixed assets and provisioned/expensed for in the case of current assets in the P&L.
Changes in asset values on the books of a company have to reflect in either the Profit and Loss Statement or the Cash Flow Statement.
An example would be if accounts receivable increased on the books, it meant an outflow of cash on the Cash Flow StatementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities.. Similarly, if inventories decreased in the books, it means an inflow of cash due to products getting sold. A decrease in the gross block is expensed on the P&L through depreciation, and an increase in the gross block is reflected by CapexCapexCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year. capital expenditures under the Cash Flow Statement.
What do Asset Accounts tell us?
Once you are through with understanding how changes in asset reflect on the Financial StatementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels., it is important to understand how investors look at asset accounts of individual companies and match it with the industry to identify operating trends. We can compare companies operating across different industries and compare how many $ of revenue a tech company generates for every $ of capital invested vs. a manufacturing company.
We can also compare companies operating in the same industry as Walmart, Target, and Costco to determine which of them are converting products to cash the fastest and most efficiently. Investors can also identify trends across the entire industry. E.g., An agrochemical company’s receivables could be continuously increasing due to the declining profitability of farmers. Such a trend would be visible across the Balance Sheet of the entire spectrum of agrochemical companies, and it helps an investor identify that the industry is going through stress.
List of Asset Accounts
- Short Term InvestmentsShort Term InvestmentsShort term investments are those financial instruments which can be easily converted into cash in the next three to twelve months and are classified as current assets on the balance sheet. Most companies opt for such investments and park excess cash due to liquidity and solvency reasons. (Cash Equivalents)
- Accounts ReceivablesAccounts ReceivablesAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet.
- Pre-Paid Expenses
- Long term Investments
- Property Plant & Equipment
- Natural Resources
- Intangible Assets like Patents / Copyrights
- GoodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.
What is a Fixed Assets Account?
- Also known as Non Current or Gross Block. These are investments made by the company in tangible and intangible assets, which the company believes will generate revenues in the future.
- Examples of tangible assets include property, machinery, equipment, land, and buildings. Intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. include patents, registrations, trademarks, and software.
- It is generally treated as “CAPEX” and is basically investments which the company believes will generate meaningful revenues in the future. A decision to incur Capex or not is based on the life cycle of the industry, as well as the return on capital that can be generated.
How to analyze Fixed Asset?
- The fixed assetThe Fixed AssetFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. can be used to compare companies operating in the same industry as well as different industries. For e.g., a company with an asset-light model like recruitment could generate equal revenues as a manufacturing company, which would be requiring lots of investment in plant, machinery, etc. It gives the company the asset-light model a high asset turnover ratioHigh Asset Turnover RatioThe asset turnover ratio is the ratio of a company's net sales to total average assets, and it helps determine whether the company generates enough revenue to justify holding a large amount of assets under the company’s balance sheet., which is measured by Sales/Average Non-Current Assets.
- However, the company generating higher revenue per dollar of non-current assets doesn’t need to be a better investment. Manufacturing brings with its stickiness and a level of sustainable advantage; hence an investor must look at the overall scheme of things in the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. and not one line item while making an investment decision.
What are the Current Assets?
- Current AssetCurrent AssetCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. includes working capital investmentsCapital InvestmentsCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc. for inventory, receivables which need to be collected from customers, as well as other liquid assets like current investments, fixed deposits, cash, and bank balances.
- Working capital is essential for every business and is a necessity to carry out all the operations effectively. A company’s bargaining power can impact its working capital requirements.
- If the company commands superior pricing power over its customers and suppliers, then they will be able to collect cash from its customers first and then pay its suppliers later, which will result in a positive net working capitalNet Working CapitalThe Net Working Capital (NWC) is the difference between the total current assets and total current liabilities. A positive net working capital indicates that a company has a large number of assets, while a negative one indicates that the company has a large number of liabilities..
How to analyze Current assets Account?
- Current assets account to reflect what is going with the company’s day to day operations. In public entities, the amount is reported once every quarter in the SEC 10-Q filing. It is extremely important to look at current assets as it indicates whether growth in revenues is being translated into cash or not. Most analysts make the mistake of ignoring the Balance Sheet and focusing on the P&L. Do not be that one!!
- So, if a company’s P&L indicates that it has grown revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. by 35% YoY and the receivables have also increased by a similar proportion, it means that the company has sold all its products on credit and not yet collected the cash. The increase in receivables is an asset (cash) that the company believes will materialize in the future. It is a common practice in companies operating across working capital intensive industries. In that instance, we must compare firms by examining their cash conversion cycleCash Conversion CycleThe Cash Conversion Cycle (CCC) is a ratio analysis measure to evaluate the number of days or time a company converts its inventory and other inputs into cash. It considers the days inventory outstanding, days sales outstanding and days payable outstanding for computation. (days in receivables + days of inventory on hand – days in payables).
What is Financial Assets Account?
Financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash. account is reported under Non-current as well as Current assets. The idea of the word current is to determine if it’s a short term investment or long term investment. Generally, liquid investments are reported under current assets, whereas non-liquid investments are reported under Non-current assetsNon-current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.. Other types of assets include goodwill and deferred tax liabilities
Assets Accounts belong to the stakeholders, who are the debt and equity investors in the companyEquity Investors In The CompanyAn equity investor is that person or entity who contributes a certain sum to public or private companies for a specific period to obtain financial gains in the form of capital appreciation, dividend payouts, stock value appraisal, etc.. It is the responsibility of an investor to look at the assets reported by the company and understand its way of conducting business and if it will maximize value to shareholders in the future. Many companies are analyzed based on the assets they have on the books. The most common example is banks, as the intrinsic value of the bank is the interest it can generate from giving loans. Hence all these loans are assets for a bank, and the value of the bank is determined by its Price to Book ratio relative to other banks. The book in this context is the book value of equityThe Book Value Of EquityThe book value of equity reflects the fund that belongs to the equity shareholders and is available for distribution to the shareholders. It is computed as the net amount remaining after deducting all of the company's liabilities from its total assets., which is the book value of assets – book value of
This article has been a guide to the Asset Accounts definition and its meaning. Here we discuss the list of Asset Accounts and its types – Fixed Assets Account and current Assets accounts, along with practical examples. You can learn more about accounting with the following articles –