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 economic value whose benefits can be derived in the future. Assets are recorded in the balance sheet of the firm.
- Assets are further classified into liquid assets 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 assets or long-term assets. A current asset is that asset which can be liquidated within a year, whereas, long-term assets are those assets which are liquidated in more than a year.
Total Assets Types
Here is the list of total asset types
- Cash & cash equivalents
- Marketable securities
- Account Receivables
- Prepaid Expenses
- Inventory
- Fixed Assets
- Intangible Assets
- Goodwill
- Various other assets
Total Assets Formula
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 equation, after considering sales revenue and expenses, is expressed as:-
Examples of Total Assets
The following are examples of Total Assets Formula
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 a loan for that real estate, what is the value of Assets?
Solution –
Given,
- Liabilities=$180,000
- Owner’s Equity=$250,000
Therefore, the calculation of total assets will be
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
- = $85,000-$62,000
- Total Owner’s Equity=$23,000
2) End of Year
Therefore, the calculation of total liabilities using below formula is
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- 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
- =$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,
- Liabilities=$200,000
- Owner’s Equity = 1/3*Assets=1/3 *A
- Total Assets Formula = Owner’s Equity+ Liabilities
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 Sheet
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 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
- 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 assets cost more to firms.
Applications of Total Assets
Used in calculating Various ratios like Net assets, ROTA (Return on Total Assets), RONA (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 ratio, which is calculated as:-
#5 – DuPont Analysis – Asset Turnover ratio is used to perform DuPont Analysis.
DuPont 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 Margin.
- Asset Use Efficiency -It is represented by Asset Turnover Ratio.
- Financial Leverage -It is represented as Equity Multiplier.
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
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