Assets

(noun)

An asset is something of economic value. Examples of assets include money, real estate, and automobiles.

Examples of Assets in the following topics:

  • Assets

    • In financial accounting, assets are economic resources.
    • Simply stated, assets represent ownership of value that can be converted into cash (although cash itself is also considered an asset).
    • Two major classes are tangible assets and intangible assets .
    • Tangible assets contain various subclasses, including current and fixed assets.
    • Current assets include inventory, while fixed assets include such items as buildings and equipment.

  • Defining the Balance Sheet

    • A standard company balance sheet has three parts: assets, liabilities, and ownership equity.
    • The main categories of assets are usually listed first, and typically in order of liquidity.
    • Assets are followed by the liabilities.
    • The difference between the assets and the liabilities is known as the equity (or the net assets, or the net worth, or capital) of the company, and according to the accounting equation, net worth must equal assets minus liabilities.
    • This balance sheet shows the company's assets, liabilities, and shareholder equity.

  • The Accounting Equation

    • The accounting equation is a general rule used in business transactions where the sum of liabilities and owners' equity equals assets.
    • A company with $30,000 in liabilities and $10,000 in owners' equity would have $40,000 in assets according to the accounting equation.
    • Or more correctly, the term "assets" represents the value of the resources of the business.
    • If the funds are borrowed to purchase the asset, assets and liabilities both increase.
    • If the company issues stock to obtain the funds for the purchase, then assets and equity both increase.

  • Activity Ratios

    • Asset turnover is a financial ratio that measures the efficiency of a company's use of its assets in generating sales income to the company.
    • Companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.
    • Fixed-asset turnover is the ratio of sales (on the profit and loss account) to the value of fixed assets (on the balance sheet).
    • It indicates how well the business is using its fixed assets to generate sales.
    • Fixed asset turnover = Net sales / Average Net Fixed Assets

  • Owners' Equity

    • Shareholders' equity is the difference between total assets and total liabilities.
    • If liability exceeds assets, negative equity exists.
    • Businesses can be considered, for accounting purposes, sums of liabilities and assets.
    • At first, all the secured creditors are paid against proceeds from assets.
    • Ownership equity is the last or residual claim against assets, settled only after all other creditors are paid.

  • Capital Expenditures

    • Capital costs are incurred for the purchase of land, buildings, construction of assets, and equipment, etc., used during business operations.
    • CAPEX are not limited to the initial construction of a building or other asset and should include other expense items, such as interest incurred during the construction phase.
    • The CAPEX costs are then amortized or depreciated over the life of the asset in question.
    • Repairing an existing asset so as to improve its useful life
    • Capitalized interest, if applicable, is also spread out over the life of the asset.The counterpart of capital expenditure is operational expenditure ("OpEx").

  • Debt Utilization Ratios

    • If Company F has $100,000 in assets, and $10,000 in total liabilities, it would have a debt ratio of 10,000 / 100,000 = 10%.
    • Company G, on the other hand, may have $100,000 worth of assets and $200,000 worth of liabilities.
    • The debt ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt.
    • It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as "goodwill").
    • For example, a company with $2 million in total assets and $500,000 in total liabilities would have a debt ratio of 25%.

  • Sample Evaluation

    • ROA (Return on Assets) = Net Income / Total Assets = 1,057 / 13,840 = 7.6%
    • BEP Ratio = EBIT / Total Assets = 1,810/13,840 = 0.311
    • Current Ratio = Current Assets / Current Liabilities = 5,240/3,500 = 1.497
    • Debt Ratio = Total Debt / Total Assets = 6,500/13,840 = 47 percent
    • This indicates the percentage of a company's assets that are provided via debt.

  • Basic types of accounts

    • Asset accounts: represent the different types of economic resources owned by a business, common examples of asset accounts are cash, cash in bank, equipment, building, inventory, prepaid rent, goodwill, accounts receivable.Assets are usually broken down into three categories: Current assets, fixed assets, and intangible assets.
    • Current assets are assets which could be converted to cash fairly quickly if necessary, certainly in less than a year.Examples of current assets include cash, cash in bank, inventory, prepaid rent, and accounts receivable.Fixed assets are assets of a more permanent nature like manufacturing equipment, buildings owned, and the like.Intangible assets, like goodwill, are monetary values assigned to intangibles like a brand name.It is typically used when accountants need to justify the purchase price of one company by another when the price cannot be justified by the monetary value of the purchased company's assets minus liabilities.Intangible assets are beyond the scope of this chapter as they apply more to larger corporations than to a start-up business.
    • Equity accounts: represent the residual equity of a business (after deducting from assets all the liabilities).In the case of a start-up company totally financed by the founder, it is often called owner's equity and represents the capital provided by the owner.If the company is a corporation and stock has been issued to the owner and to others, it is often called stockholders' equity.
    • Setting up an appropriate chart of accounts will take some careful thought on your part because you want to be sure that accounts are set up in each category (i.e. assets liabilities, etc. ) that will enable you to accumulate accounting transactions in a meaningful way.
    • For example, starting with the asset account category, you may decide that you need to begin your business with at least the following accounts:

  • Liquidity Ratios

    • Liquidity ratios measure how quickly assets can be turned into cash in order to pay the company's short-term obligations.
    • Liquidity ratios measure a company's ability to pay short-term obligations of one year or less (i.e., how quickly assets can be turned into cash).
    • If current liabilities exceed current assets (i.e., the current ratio is below 1), then the company may have problems meeting its short-term obligations.
    • If the current ratio is too high, the company may be inefficiently using its current assets or its short-term financing facilities.
    • A firm may improve its liquidity ratios by raising the value of its current assets, reducing the value of current liabilities, or negotiating delayed or lower payments to creditors.