Assets are listed in the order of liquidity and over a period of time most of the assets are written off as expensed or depreciated. Depreciation is a process of spreading the cost of an asset over a defined period. Let us understand more details about what is assets in accounting along with their asset types and asset examples.
Asset Turnover Ratio is generally used to measure the efficiency of assets to generate revenue. It is defined as a ratio between sales revenue and total assets. Return on Assets Ratio is used to measure the ability of assets to generate profit. It is calculated as a ratio between net income and total assets. Net income is the amount earned by a company after subtracting expenses.
What is Assets in Financial Accounting?
Assets are resources which have monetary value and are owned by a company or a business to generate revenue in the future. Assets are classified as fixed, current, tangible, or intangible.
- Fixed Assets
- Current Assets
- Intangible Assets
- Tangible Assets
- Liquid Assets
Assets are recorded as items of ownership in the balance sheet which can be found in the company’s annual reports. In the balance sheet, assets are listed at historical cost and not at the market value.
In this section we will look at the definition, meaning and examples of fixed assets, different types of fixed assets, fixed asset management, fixed asset accounting, depreciation of fixed assets and fixed asset investment.
- Fixed Assets Meaning And Definition
- Examples Of Fixed Assets
- Tangible Vs Intangible Fixed Assets
- Gross Vs Net Fixed Assets
- Fixed Asset Management
- Fixed Asset Accounting
- Fixed Asset Investment
Fixed Assets Meaning and Definition
Fixed assets, also known as capital assets or non-current assets are long term tangible assets that are purchased and used by the company in its normal business operations or for the production of goods and services.
Fixed assets are non-current assets that have a useful life of more than one year and appear as property, plant or equipment in the balance sheet. Fixed assets are illiquid and cannot be converted into cash easily.
Fixed assets are crucial to any company as they are used to produce goods and services and generate revenue. They are not sold to customers and are not held with the purpose of investment.
Fixed Asset Turnover Ratio can be used to determine the efficiency of fixed assets and is closely observed by investors. A company with a higher ratio has a competitive advantage over its competitors.
Examples of Fixed Assets
- Buildings And Facilities
- Computer Equipment
- Computer Software
- Construction In Progress
- Leasehold Improvements
- Office Equipment
- Office Furniture
Tangible Vs Intangible Fixed Assets
Intangible fixed assets are non physical assets which include trademarks, goodwill, copyrights, franchises and patents. Tangible fixed assets are physical assets like buildings, vehicles, machinery, office equipment, etc.
Gross Vs Net Fixed Assets
Gross fixed assets is an accounting term that refers to the total cost of fixed assets present in the company whereas the value of net fixed assets can be calculated by subtracting the depreciation value from gross fixed assets.
Fixed Asset Management
Fixed asset management is a process of tracking and maintaining the physical assets and equipments used in the company. There are many asset management systems and softwares available using which the company can:
- Track and monitor fixed assets
- Oversee equipment and machinery in multiple locations
- Lower maintenance costs
- Improve operational efficiency
- Maintain a record of retired, sold, stolen or lost assets
Fixed asset management helps the company to monitor and assess the condition of physical assets and equipments and keep them in good working order. It also helps the company to increase the life of an asset by minimizing the downtime and failure of the equipment.
Fixed Asset Accounting
Fixed asset accounting is the process of accurately recording all the financial data related to fixed assets. As per financial accounting principles, fixed assets are listed under cash flow statements.
Fixed assets are subject to constant devaluation over a period of time. As a result, these assets decline in value each year which is known as depreciation of fixed assets.
When the fixed assets are first added in financial records, following transactions are carried out. Periodic depreciation which is applicable to tangible assets, amortization which is applicable to intangible assets and disposal of fixed assets.
Fixed Asset Investment
Fixed asset investment is a measure of capital spending by any company or country. It refers to the process of investing in physical assets like real estate or infrastructure which are held for more than one year.
In this section we will look at the definition, meaning and examples of current assets and different types of current assets.
- Current Assets Meaning And Definition
- Examples Of Current Assets
Current Assets Meaning and Definition
Current assets represent all the assets of the company which can be converted into cash within the operating cycle of the company. Generally, all the companies have an operating cycle of one year. Current assets are also known as current accounts.
Investors and creditors are more interested in ratio of current assets to current liabilities of the company as it indicates the short-term liquidity of the company and its ability to meet short-term obligations. Investors also use other ratios like cash ratio, current ratio and quick ratio.
Examples of Current Assets
Current assets are listed in balance sheet in order of liquidity which means that the most liquid assets are shown first. Below are few examples of current assets.
- Cash And Cash Equivalents
- Temporary Investments
- Accounts Receivable
- Prepaid Expenses
List / Different Types of Current Assets
- Petty Cash
- Cash On Hand
- Cash In Bank
- Cash Advance
- Short Term Loan
- Account Receivables
- Prepaid Expenses
- Short Term Investments
Petty cash refers to small amount of cash which can be used for small and immediate expenses. Petty cash is recorded as moving the cash on hand or cash in bank to petty cash and then transferring it to expenses at the time of settlement.
Cash On Hand
Cash on hand comes from cash sales or cash collection from customers. This cash is not used for making payments unless it is transferred to petty cash. Cash on hand is not recorded in the income statement of the company.
Cash In Bank
Cash in bank refers to the money available in the bank account of the company which includes current account, saving account or fixed deposit with a maturity of less than one year. Cash in bank is shown in the balance sheet of the company.
Cash advance refers to the cash given in advance to the employees of the company for business purposes. Cash advance is shown as an outstanding amount in the financial statement until settlement.
Short Term Loan
Short term loan refers to the loan given by the company to its employees or some other company for a short term period of less than one year. Short term loan is shown as outstanding loan in the financial statement of the company.
Most of the time a company sells the goods and services to its customers on credit and the payment period varies from a few days to a few months. Account receivables which are expected to be collected within one year are classified as current assets.
Inventories are classified into three types: raw material, work in progress and finished goods. Inventories are recorded under current assets in the balance sheet of the company.
Prepaid expenses are considered under current assets as they are paid in advance before the goods or services are received. Examples of prepaid expenses include interest payment, premium payment for insurance or rent paid in advance.
Short Term Investments
Any investments which are expected to be sold within one year are considered under current assets. Short term investments include the investment made in stocks, bonds, mutual funds, etc.
In this section we will look at the definition, meaning and examples of intangible assets and different types of intangible assets.
- Intangible Assets Meaning And Definition
- Examples Or Types Of Intangible Assets
- Valuing Intangible Assets
- Financial Accounting For Intangible Assets
Intangible Assets Meaning and Definition
Intangible assets are non physical assets that add value to your business. Intangible assets are long term assets, meaning you will use these assets for more than one year.
Intangible assets are classified into two categories. First one is limited life intangible assets such as patents, copyrights, and goodwill. Second one is unlimited life intangible assets such as trademarks.
Intangible assets cannot be destroyed by fire, flood, hurricane or any other accidents or disasters. In fact they can be used in building destroyed tangible assets. However, intangible assets cannot be used as collateral to apply for loans.
Examples / Types of Intangible Assets
- Newspaper Mastheads
- Internet Domain Names
- Noncompetition Agreements
- Customer Lists
- Order Backlog
- Customer Relationships
- Performance Events
- Literary Works
- Musical Works
- Motion Pictures
- Television Programs
- Licensing Agreements
- Service Contracts
- Lease Agreements
- Franchise Agreements
- Broadcast Rights
- Employment Contracts
- Use Rights
- Patented Technology
- Computer Software
- Trade Secrets
Valuing Intangible Assets
Valuing intangible assets is more difficult than valuing tangible assets as they do not have any fixed value. However, there are different methods available for valuing intangible assets like cost method, market method and income method.
In cost method, you can calculate the cost it would take for another business to duplicate or recreate your intangible asset. You can either use the present cost or original cost that went into creating your intangible asset.
In market method, you can use the reference value of similar intangible assets used by other companies in your industry. In income method, you can use the cash flow projections to measure the future benefits of the intangible asset.
Financial Accounting for Intangible Assets
Financial accounting principles require you to record intangible assets in the balance sheet. Intangible assets which are created within your business are not recorded. Only those intangible assets are recorded which are acquired or bought by your business.
In this section we will look at the definition, meaning and examples of tangible assets and different types of tangible assets.
- Tangible Assets Meaning And Definition
- Examples Or Types Of Tangible Assets
- Valuing Tangible Assets
Tangible Assets Meaning and Definition
Tangible assets, also known as hard assets, are physical items which are used in daily operations and add value to your business. Tangible assets face depreciation over a period of time and have residual or scrap value.
Tangible assets have long term physical existence and are acquired for business operations not for sale to customers. Tangible assets can be destroyed in fire, hurricane, flood or any other disasters or accidents.
However, tangible assets can be used as collateral to obtain loans. They can also be sold during emergencies to raise the cash. Tangible assets are classified into two types; fixed tangible assets and current tangible assets.
Examples / Types of Tangible Assets
- Accounts Receivable
Valuing Tangible Assets
Compared to intangible assets, valuation of tangible assets is not a complicated process. Different methods like appraisal method, liquidation method and cost replacement method can be used to value tangible assets.
Under the appraisal method, an appraiser is hired to determine the fair market value of company’s assets. The asset appraiser will assess the condition of all the assets and will evaluate the open market value for these assets.
Since tangible assets can be converted into cash, it is important for the company to know the minimum value the assets will bring under quick sale or liquidation. Liquidation method helps the company to find out how much the asset buyers would be willing to pay in case of liquidation.
Replacement cost method is used by insurance companies to find out the value of the asset for insurance purposes. In this method, insurance companies determine how much it would cost to replace the existing asset.
Liquid assets are assets that can be easily converted into cash at a reasonable price. Generally, liquid assets are traded on markets with large number of buyers and sellers. Large trading volumes ensure fast disposal of liquid assets without any significant loss of value.
Liquid assets determine the company’s ability to meet immediate financial and operating expenses. They also help in protecting the company during negative events like recession or declining sales of company’s products or services.
Liquid assets are also important in personal finance. Having liquid assets in your personal investment portfolio can help you to meet immediate financial obligations. Liquid assets can also be used in hedging your portfolio against negative events.
Different Types of Liquid Assets
- Cash In Hand
- Cash In Bank
- Cash Equivalents
- Accrued Income
- Promissory Notes
- Government Bonds
- Marketable Securities
- Accounts Receivable
- Certificates Of Deposit
- Tax Refunds