What are Total Assets?
Total Assets, most commonly used in the context of a corporation, is 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.
- Assets are further 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. and 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 that asset which can be liquidated within a year, whereas long-term assets are those assets that are liquidated in more than a year.
Total Assets Types
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 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.
- Prepaid Expenses
- 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.
- Various other assets
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’s or Stockholder’s Equity).
The extended 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:-
Examples of Total Assets
The following are examples of Total Assets
If a business owns a piece of real estate where the owner’s equity worth $250,000, and they owe $180,000 on 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 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. owner’s equity is 1/3 of its total assets. Its liabilities $200,000.What is 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 Sheet
Now, let us have a look at some of its advantages
- It can be used at any time to repay liabilities.
- Current Assets, on the one hand, 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, fewer liabilities mean more valuable firm.
- Accounts Receivables are another important part of Assets, which helps in building good relationships with various clients, which allows clients to purchase on credit and pay later.
- Various business deals like Mergers and Acquisitions, 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
- Depreciation in Value of Fixed Assets over the years.
- One can’t claim capital allowances on a leased asset if the lease period is less than 5 years.
- In the case of non-repayment of liabilities, the mortgaged asset can be auctioned by the bank in order to collect the loan amount.
- Sometimes assets become non- performing assets, 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.
Applications of Total Assets
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 Ratio, 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 ratio of Net income 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 used 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 – It is represented by 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. .
- Asset Use Efficiency -It is represented by Asset Turnover Ratio.
- Financial Leverage -It is represented as Equity Multiplier.
Asset plays a significant role in the vast study of the financial world. Individuals or Entities should hold more Assets and fewer liabilities in order to improve their market value and their sustainability for the future. In order to get more projects in 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 firm can earn on their current investment over the period of time.
This has been a guide to what is Total Assets and its definition. Here we discuss the types of total assets along examples and its applications. You can learn more about accounting from the following articles –