Introduction
In the last article, where we introduced the Balance Sheet, we examined that a Balance Sheet shows what the company has (i.e. its Assets), and where it obtained the money for those Assets from (Equity and Liabilities). Today, we are going to focus on Assets – what they exactly are, and how they can be divided.
So, what do we mean by a particular company’s Assets?
Basically, we can say that assets are all the goods the company has. So, they can be a company’s factory building, office building, computers, software, coffee machine, furniture in the office, cars the company owns, and so on. In a professional environment we can say that an asset is an economic resource which company has the right to control or that it owns them, and it is expecting to use them in profit-generating activities. This is a broader definition, and it is helpful in sophisticated accounting issues, when professional accountants have to decide whether record something as an asset or not (there are other criteria that can help to determine it).
Main type of Assets – Long-Term (Non-Current) Assets vs. Short-Term (Current) Assets
We can divide Assets into two main categories – long-term and short-term assets. Simply, assets that are held for a period longer than 12 months, are called long-term (non-current) assets. On the other side, assets held for less than 12 months, are called short-term (current) assets. For example, if a company buys a computer and expects that it will be using it for the next five years, this computer would be an example of a non-current asset since the company will probably use it for the next five years. On the other hand, an example of a short-term (current) asset can be cash. Cash is a highly liquid instrument, and can be easily used by a company for some other purposes immediately. Thus it is expected that the company will hold the cash for less than 12 months, and therefore we recognise it as a short-term (current) asset.
Examples of Long-Term (Non-Current) Assets:
Land,
Property or buildings,
Computers,
Computer software,
Phones,
Office furniture,
Company’s Cars.
All the assets above will usually be held by the majority of companies for more than 12 months. Some of them can be depreciated (we will talk about depreciation later).
Examples of Short-Term Assets:
Cash,
Inventories (Note 1),
Trade receivables (Note 2),
Short-term investments, like 6-month Bond.
Note 1:
Inventories are a term which we use for describing for goods that a company has (or has produced), but which are still waiting to be sold. Example: when Toyota has 100 Toyota Corolla cars at the end of an Accounting year, which are produced or are in production, and which are not yet sold, those 100 Toyota Corollas are an example of Inventories.
Note 2:
Trade receivables exist when a company has sold some goods or services (the goods have been accepted by the customer) but the customer has not yet paid for them. Example: Mr Smith bought a house from HappyHouses Plc, a company that builds houses and sells them. He bought the house on 30 December 2020, but the deadline for his payment for the house is 31 January 2021, and Mr Smith pays the amount in full on 20 January 2021. This money is a trade receivable, since the customer has accepted the product (here – the house), but has not yet paid for the house. (Note that we assume that HappyHouses Plc has the end of an Accounting year on 31 December 2020). This is directly related to the accruals accounting (or the matching principle), which states that transactions should be recognised when the goods are sold (when customer accepts them) and in a period when the sales occurs, not when cash is received. We will talk about this concept later.
Other categories of assets – tangible vs intangible.
We can also differentiate between tangible and intangible assets. Tangible assets are those, which have physical existence – they are the majority of assets most companies have. They are buildings, land, cars, and so on. However, we sometimes use the concept intangible assets. These can be for example a good image a company has. It is difficult to value it, and to ‘touch’ it, but sometimes the reputation can be very important. For example, Apple is widely known that its products are of a very high quality. The fact that many people associate Apple with top-quality phones, notebooks or other devices, can be in some cases regarded as a company’s asset too. It is difficult to appropriately valuate the intangible assets. Overall, this division is less important, and we just mentioned it here to make you aware that sometimes assets are divided also in this way. It is important to know what they are, however at the basic level, it is not necessary to know how to decide whether an asset is tangible or intangible, and how to valuate intangible assets.
Summary:
Assets represent everything the company owns (which have economic value, is likely to produce future economic value, and which the company owns or controls).
We can divide Assets to Current (held for less than 12 months) or Non-Current (held for more than 12 months).
Another categories assets are divided into, are the intangible or tangible assets, which refer to whether an asset has a physical substance or not.
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