What are Assets in Accounting?
Assets in accounting are the medium through which business can be undertaken, are either tangible or intangible and have a monetary value that can be associated with it due to the economic benefits that can be derived from them. Examples of Assets include Property, Plant and Equipment, Vehicles, Cash and Cash EquivalentCash And Cash EquivalentCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read mores, Accounts Receivables, and Inventory.
Following are the characteristics of assets:
- It is owned and controlled by the enterprise.
- It provides a probable future economic benefit.
Types of Assets in Accounting
Assets can be of 2 types:
- Current AssetsCurrent AssetsCurrent 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.read more
- 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.read more.
Based on the maturity of the asset, it can be classified as Current (if maturing in 12 months from the reporting date) or as Non-Current (if maturing beyond 12 months from the reporting date).
There are various kinds of components of Current as well as Non-Current assets, which are as follows:
| Current Assets | Non-Current Assets |
| Cash and Cash Equivalent | Property, Plant, and Equipment |
| Trade ReceivablesTrade ReceivablesTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more | Intangibles |
| Readily Marketable securitiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company's balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.read more | Long term Lease obligations |
| Stock in trade | Investment in Subsidiaries |
| Deposits | Deferred Tax Assets |
| Prepaid Liabilities | Derivative Assets |
Accounting of Assets
Globally, all corporates have to calculate their assets as well as liabilities based on the given set of instructions and guidelines. They have given a set of instructions for each of the above components,s which is to be followed while calculating them.
However, the total asset figure is the sum total of all the above-mentioned components of the assets duly calculated as per the set of rules. Let’s understand some examples of assets accounting.
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For eg:
Source: Assets in Accounting (wallstreetmojo.com)
Example #1
The following are the components of the assets of Amazon.com, Inc as of 31st Dec 2017.
Cash of $ 19334 Mn, Marketable Securities of $ 6,647 Mn, Inventories of 11,461 Mn, Trade receivable of $ 8,339 Mn, Property Plant and Equipment of $ 29,114 Mn, 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.read more of $ 3,784 Mn and Other assets of 4,723 Mn.
Calculation of Total assets in accounting is as follows,
Total Assets of the company = $19,334 Mn + $ 6,647 Mn + $ 11,461 Mn + $ 8,339 Mn + $ 29,114 Mn + $ 3,784 Mn + $ 4,723 Mn = $ 83,402 Mn
Hence, Amazon.com, Inc has total assets of $ 83,402 Mn as of 31st Dec 2017.
Example #2
Following are the components of the BP group of companies as on 31st Dec 2017, please calculate current assets, Non-current assets, and Total Assets:
Property Plant and EquipmentProperty Plant And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read more of $ 129,471 Mn, Intangibles of $ 29,906 Mn, Investment in Subsidiaries of $ 26,230 Mn, Derivative Financial Instruments of $ 4,110 Mn, Deferred Tax payments of $ 4,469 Mn, Inventories of $ 19,011 Mn, Trade Receivable of $ 24,849 Mn, Cash and Cash Equivalent of $ 25,586 Mn.
Calculation of current assets in accounting is as follows,
Current Assets= $ 19,011 Mn + $ 24,849 Mn + $ 25,586 Mn = $ 69,446 Mn
Calculation of non current assets in accounting is as follows,
Non-Current Assets = $ 129,471 Mn + $ 29,906 Mn+ $ 26,230 Mn + $ 4,110 Mn + $ 4,469 Mn = $ 194,186 Mn
Calculation of Total assets in accounting is as follows,
Thus, Total Assets= $ 263,632 Mn
Hence, the BP group of companies has total assets worth $ 263,632 Mn as of 31st Dec 2017.
Limitations
- Consideration to only Monetary Factors, it ignores non-monetary factors. Hence intangibles such as self-developed patent valuation will always be in doubt of improper calculation.
- Historical based accounting, hence present market value is not available in the financial statementFinancial StatementFinancial 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.read more.
- Depreciation method, it is on the management to choose the depreciation method for property plant and equipment. Due to this, comparability is not possible.
- Estimates are considered while assuming the useful life, scrap value, etc. professional judgments are used to estimate the figures, which are highly subjective in nature.
Change in Assets in Accounting
The value of assets keeps on changing from year to year. There are numerical factors that can affect the values of the assets.
- Depreciation and amortization – One has to determine the method of depreciation of PPE by considering the nature of assets, their useful life, and scrap value. For amortization, one has to consider the nature of intangibles, its ownership, and how the intangibles will help the entity in gaining revenueRevenueRevenue 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.read more.
- Impairment of assets– Impairment means to deplete the value based on the change in market factors. It is considering when the book value of the asset is less than the market value of the asset.
- Obsoleting of technology – Machinery is highly dependent on the version of the technology prevailing in the market. Hence, any depletion, obsolescence will lead to a change in the value.
- Sale of an asset– This is one of the most common scenarios in which an entity sells the assets either for replacement or for the diversification. The main thing one has to determine while recording the sale of an asset is gain on sale, market rate, and stamp duty value.
- Change in the useful life of the asset – Many factors like depreciation, impairment, or capacity of assets are highly dependent on the useful life estimate. Any change in the same will be needed to be considered judiciously. Also, taking professional or actuarial opinions while estimating the useful life will add to the authenticity of the estimates.
- Change in the statutory requirement to change the disclosure – Accounting of the assets is always happen under the strict guidelines of IFRS, GAAP, and local laws. Disclosure and valuation will be dependent on these rules. Any change in them will directly require a change in the disclosure and valuation in the statements.
Conclusion
Assets represent the owned assets that an entity is having, utilizing which company will be able to meet its all the future liabilities. Hence, it is of utmost critical in determining the value of assets and to check the assumptions used in calculating the same.
In the past, there are several instances that assets were misrepresented, and financial statements were window dressed in order to obtain the funding’s from the financial institutions. Hence, while reading the assets in balance sheets, one should read notes to accounts accurately, considering all the disclaimers provided by auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more and board of directors.
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