What Are Total Assets?
Total Assets, most commonly used in the context of a corporation, are defined as the assets owned by the entity that has an economic value whose benefits can be derived in the future. Assets are recorded in the balance sheetAssets Are Recorded In The Balance SheetAssets in accounting refer to the organization's resources that hold specific economic value and facilitate business operations, meet expenses, and generate cash flow. They create the company's worth and are recorded in the balance sheet. of the firm.
Asset plays a significant role in the extensive study of the financial world. Individuals or Entities should hold more Assets and fewer liabilities to improve their market value and sustainability for the future. To get more projects in the future, the company should look healthy, and a firm’s health will be decided on various parameters, among which “Asset” is the most crucial one, as it will help in predicting the range of profit a firm can earn on their current investment over the period.
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Total Assets Explained
The concept of total asset falls under the category of financial statement and reporting. It is the value of all the resources that the company owns. They are clearly recorded in the financial statements so that the stakeholders of the company gets an idea about the actual value of assets in possession of the business.
Assets are classified into liquid assetsLiquid AssetsLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company's balance sheet. illiquid assets, depending on their liquidity. A liquid asset is that asset that can be easily converted into cash or readily sold for cash; otherwise, it is called an Illiquid asset.
Assets are also classified on the balance sheet as either 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. or long-term assets. A current asset is an asset that can be liquidated within a year, whereas long-term assets are those assets that are liquidated in more than a year.
When we calculate total assets, the value show what is the asset position or how much resource it has to handle its financial obligation, or invest in new or existing projects for the purpose of growth and expansion. It is an important metric that helps investors, analysts and management to evaluate the financial health of the business and make investment decisions.
Here is the list of total asset types
- Cash & cash equivalents
- 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.
- Account ReceivablesAccount ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year.
- Prepaid ExpensesPrepaid ExpensesPrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period.
- Fixed AssetsFixed AssetsFixed 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.
- 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.
- 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.
- Various other assets
Thus, the above total assets equation show the different categories of assets that come under the head of total assets in the balance sheet. All of them together contribute of generation of an economic benefit that will have a positive effect on the company and help it is meeting the various current and non-current financial obligations. These assets help the business to maintain liquidity and solvency and ensure its sustainance.
Basic Formula in accounting is expressed as:-
The equation must balance because everything the firm owns must be purchased from debt (liabilities) and capital (Owner or stockholders equity).
The expanded accounting equationAccounting EquationAccounting Equation is the primary accounting principle stating that a business's total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. , after considering sales revenue and expenses, is expressed as:-
In the above total assets equation, we add all the components to get the value of total assets. Th eliabilities are the financial obligations that the business should meet in its day to to operations, like payment to suppilers and creditors, payment of salary and wage to employees, interest payment on loans, annual dividend payout, etc. Then comes owner’s equity which is part of the total asset that the owners of the business have contributed on their own.
Then come the net revenue or the net expense which is calculated by deducting the total expense from total revenue. If it is positive, then the company’s is in a good financial condition having good free cash flow. Finally, the drawings made by any owners of the business from their equity is deducted to arrive at the figure of total value of assets.
The following are examples of total assets on balance sheet.
If a business owns a piece of real estate where the owner’s equity is worth $250,000, and they owe $180,000 on a loan for that real estate, what is the value of Assets?
- Owner’s Equity=$250,000
Therefore, the calculation of total assets will be
The summaries of the balance sheet and income statement data follow.
- Beginning of the Year – assets $ 85,000, Total liabilities $62,000, Total owner’s equity?
- End of Year – assets $110,000, Total owner’s equity $60,000, Total liabilities?
- Changes during the year in the owner’s equity – Investments by owner? Drawings $18,000,Total revenues $175,000, Total expenses $140,000.
1) Beginning of Year
Therefore, the calculation of total owner’s equity using below formula is
- = $85,000-$62,000
- Total Owner’s Equity=$23,000
2) End of Year
Therefore, the calculation of total liabilities using the below formula is
- Total Liabilities=$110,000-$60,000
- Total Liabilities=$50,000
3) Changes during the Year in Owner’s Equity
Opening Balance $23,000, Investments by owner?, Drawings -$18,000,Total revenues +$175,000, Total expenses -$140,000, Closing Balance $60,000.
Therefore, the calculation of owner’s investment using below formula is
Closing Balance = Opening Balance + Owner’s Investments – Drawings + Revenues – Expenses
- $60,000=$23,000+ Owner’s Investments-$18,000+$175,000-$140,000
- Owner’s Investments=$20,000
A co. The owner’s equity is 1/3 of its total assets. Its liabilities are $200,000.What are the total assets?
- Owner’s Equity = 1/3*Assets=1/3 *A
- Total Assets FormulaTotal Assets FormulaTotal Assets is the aggregate of liabilities and shareholder funds. It can also be computed by combining current and noncurrent assets. = Owner’s Equity+ Liabilities
- A= 1/3 *A+$200,000
- A- 1/3*A = $200,000
- 2/3*A = $200,000
- A= $100,000*3
- A = $300,000
Preparing a 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.
Now, let us have a look at some of its advantages of total assets on balance sheet.
- It can be used at any time to repay liabilities.
- On the one hand, Current Assets can be easily converted for liquid cash whereas, on the other hand, Long Term Assets can be used as a mortgage to support working capital.
- Assets help in improving the valuation of the firm. More Assets and fewer liabilities mean a more valuable firm.
- Accounts Receivables are another important part of Assets, which helps build good relationships with various clients, allowing clients to purchase on credit and pay later.
- Various business deals like Mergers and AcquisitionsMergers And AcquisitionsMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion., Tie-ups, etc. assets play a vital role, as every decision is taken by considering the firm’s assets.
- Leasing or renting assets such as machinery or office equipment can save you the initial costs of buying them outright.
Now, let us have a look at some its disadvantages of value of total assets.
- Depreciation of Fixed Assets over the years.
- One can’t claim capital allowances on a leased asset if the lease period is less than five years.
- In the case of non-repayment of liabilities, the bank can auction the mortgaged asset to collect the loan amount.
- Sometimes assets become non- performing assetsNon- Performing AssetsNon-Performing Assets (NPA) refers to the classification of loans and advances on a lender's records (usually banks) that have not received interest or principal payments and are considered "past due." In the majority of cases, debt has been classified as non-performing assets (NPAs) when loan payments have been outstanding for more than 90 days., and maintenance or written-off of such assetsWritten-off Of Such AssetsWrite off is the reduction in the value of the assets that were present in the books of accounts of the company on a particular period of time and are recorded as the accounting expense against the payment not received or the losses on the assets. cost more to firms.
They are used in calculating Various ratios like Net assets, ROTA (Return on Total Assets), RONARONAReturn on net assets determines the efficiency of the company's net assets to generate profit. It analyzes the income-generating ability of the net working capital and the fixed assets employed in the business. (Return on Net Assets), Asset Turnover RatioAsset 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., DuPont Analysis, etc.
#1 – Net Assets – This is a difference between Total Assets and Total Liabilities.
#2 – ROTA – Return on Total Assets is calculated as the Net income ratio to the total value of its assets.
#3 – RONA – Return on Net Assets is calculated as
#4 – Asset Turnover Ratio – This is an activity ratioActivity RatioActivity Ratios measure the organizational efficiency to utilize its various operating assets (as shown in the balance sheet) to generate sales or cash. It includes inventory turnover ratio, total assets turnover ratio, fixed asset turnover ratio and accounts receivable turnover ratio., which is calculated as:-
#5 – DuPont Analysis – Asset Turnover ratio is used to perform DuPont Analysis.
DuPont formulaDuPont FormulaDuPont formula determines the return on equity (ROE), depicting the efficient utilization of shareholders' capital into the business for generating revenue. The formula is "Return on Equity (ROE) = Profit Margin * Total Asset Turnover * Leverage Factor". analysis is a useful method to decompose the various drivers of return on equity (ROE). Fragmentation of ROE allows investors to focus on the key metrics of financial performance individually to identify strengths and weaknesses. These metrics of financial performance are:-
- Operating Efficiency – Profit MarginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. Profit Margin represents it.
- Asset Use Efficiency -Asset Turnover Ratio represents it.
- Financial Leverage -It is represented as Equity MultiplierEquity MultiplierThe equity multiplier is a simple ratio of total assets to total equity that helps us understand how much of the company's assets are financed by shareholder equity. If this ratio is higher, the financial leverage (total debt to equity) is higher and vice versa..
Total Assets Vs Current Assets
Both the above are two categories of assets that are clearly stated in the balance sheet of every company. However, it is important to know the differences between them, which are as follows:
- The former represents the total value of all the assets of the business which include the latter, whereas the latter is just the value of assets that can be converted to cash immediately or within one year.
- The former does not represent any particular time horizon but the latter shows only the assets that are meant for short term, which is primarily within one year.
- The former is the total value which represents the total resource of the company whereas the latter is a subset of the former, which shows only the current resource.
- The former depicts both short- and long-term assets but the latter shows only the short-term assets.
Thus, the above are some important differences between the two. However, both the concepts are equally crucial for analysts, investors and the company management for assessment regarding ability of the company to meet its financial obligations.
This has been a guide to what are Total Assets. We explain its formula & differences with current assets with examples, types, advantages, disadvantages. You can learn more about accounting from the following articles –