Total Assets

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.read more of the firm.

Total Assets Types

Here is the list of total asset types

Formula

Basic Formula in accounting is expressed as:-

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

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Source: Total Assets (wallstreetmojo.com)

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

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

Examples of Total Assets

The following are examples of Total Assets

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 worth $250,000, and they owe $180,000 on 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 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. owner’s equity is 1/3 of its total assets. Its liabilities $200,000.What is 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

  • 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.

Disadvantages

Now, let us have a look at some its disadvantages

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.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 ratio of Net income 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 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:-

 Conclusion

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.

Recommended Articles

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 –

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