Total Assets

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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.read more of the firm.

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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.

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.read more 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.read more 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.

Types

Here is the list of total asset types

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.

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Formula

Basic Formula in accounting is expressed as:-

Total Assets = Liabilities + Owner’s Equity
Total Assets Formula

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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. read more, after considering sales revenue and expenses, is expressed as:-

Assets = Liabilities + Owner’s Equity + (Revenue – Expenses) – Draws

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.  

Examples

The following are examples of total assets on balance sheet.

You can download this Total Assets Excel Template here – Total Assets Excel Template

Example #1

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?

Solution –

Given,

Therefore, the calculation of total assets will be

Total Assets Example 1

Example #2

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.

Solution

1) Beginning of Year

Therefore, the calculation of total owner’s equity using below formula is

Example 2png
  • = $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 Assets Example 2.1png
  • 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

Example 2.2png

Closing Balance = Opening Balance + Owner’s Investments – Drawings + Revenues – Expenses

  • $60,000=$23,000+ Owner’s Investments-$18,000+$175,000-$140,000
  • =$60,000-$23,000+$18,000-$175,000+$140,000
  • Owner’s Investments=$20,000

Example #3

A co. The owner’s equity is 1/3 of its total assets. Its liabilities are $200,000.What are the total assets?

Given,

Solution

  • A= 1/3 *A+$200,000
  • A- 1/3*A = $200,000
  • 2/3*A = $200,000
  • A= $100,000*3
  •  A = $300,000

Example #4

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.read more

Example 3png

Advantages

Now, let us have a look at some of its advantages of total assets on balance sheet.

Disadvantages

Now, let us have a look at some its disadvantages of value of total assets.

Applications

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.read more (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.read more, DuPont Analysis, etc.

#1 – Net Assets – This is a difference between Total Assets and Total Liabilities.

Net Assets = Total Assets – Total Liabilities

#2 – ROTA – Return on Total Assets is calculated as the Net income ratio to the total value of its assets.

ROTA = Net Income / Total Assets

#3 – RONA – Return on Net Assets is calculated as

RONA = Net Income / Fixed Assets + Net  Working Capital

#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.read more, which is calculated as:-

Asset Turnover Ratio = Net Sales / Total Assets

#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".read more 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:-

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.

Recommended Articles

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 –

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