What are Assets in Accounting?

Assets in accounting are a medium through which one can undertake businesses, either tangible or intangible, having a monetary value due to the economic benefits. Assets include property, plant and equipment, vehicles, Cash and Cash EquivalentCash And Cash EquivalentCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation.  Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more, accounts receivables, and inventory.

Following are the characteristics of assets:

  • It is owned and controlled by the enterprise.It provides a probable future economic benefit.

Types of Assets in Accounting

Assets can be of two types:

  • Current AssetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read moreNon-Current AssetsNon-Current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company’s investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.read more

Based on the asset’s maturity, they can be classified as Current (if maturing in 12 months from the reporting date) or Non-Current (if maturing beyond 12 months from the reporting date).

There are various kinds of components of current as well as non-current assets, which are as follows:

Current Assets Non-Current Assets

Accounting of Assets

All corporations have to calculate their assets and liabilities based on a given set of instructions and guidelines. Accordingly, they have instructions for each of the above components, which must be followed while calculating them.

Additionally, the total asset figure is the total of all the components mentioned above, the assets duly calculated as per the rules.

Let’s understand some examples of assets accounting.

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Example #1

Cash of $19,334 million 

Marketable securities of $6,647 million 

Inventories of $11,461 million 

Trade receivables of $8,339 million

Property, plant, and equipment of $29,114 million

GoodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more of $3,784 million 

Other assets of $4,723 Mn

The calculation of Total assets in accounting is as follows,

Total assets of the company = $19,334 million + $6,647 million + $ 11,461 million + $8,339 million + $29,114 million + $3,784 million + $4,723 million = $83,402 million

Example #2

Following are the components of the BP group of companies as of December 31, 2017. Please calculate current assets, non-current assets, and total assets:

Property Plant and EquipmentProperty Plant And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read more of $129,471 million

Intangibles of $29,906 million

Investment in subsidiaries of $26,230 million

Derivative financial instruments of $4,110 million

Deferred tax payments of $4,469 million

Inventories of $19,011 million

Trade receivables of $24,849 million

Cash and cash equivalent of $25,586 million

Calculation of current assets in accounting is as follows,

Current Assets= $19,011 million + $24,849 million + $25,586 million = $69,446 million

The calculation of non-current assets in accounting is as follows,

Non-Current Assets = $129,471 million + $29,906 million + $26,230 million + $4,110 million + $4,469 million = $194,186 million

The calculation of total assets in accounting is as follows,

Thus, Total Assets= $263,632 million

Hence, the BP group has total assets worth $263,632 million as of December 31, 2017.

Limitations

  • Consideration of only monetary factors ignores non-monetary factors. Hence, intangibles such as self-developed patent valuation will always be under doubt of improper calculation.Historical-based accounting, hence present market value, is not available in consideration of only Monetary Factors. It ignores non-monetary factors. Hence intangibles such as self-developed patent valuation will always be in doubt of improper calculation.Hence, Historical based accounting, is not available in theFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more financial statementFinancial StatementFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more, hence present market value.The depreciation method is for the management to choose the property, plant, and equipment. Due to this, comparability is not possible.Estimates are considered while assuming the useful life, scrap value, etc. Therefore, professional judgments are used to estimate highly subjective figures.

Change in Assets in Accounting

The value of assets keeps on changing from year to year. There are numerical factors that can affect the values of the assets.

  • Depreciation and amortization – One has to determine the method of depreciation of PPEMethod Of Depreciation Of PPEDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
  • read more by considering the nature of assets, their useful life, and scrap value. For amortization, one has to consider the nature of intangibles, their ownership, and how they will help the entity gain revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more.Impairment of assets– Impairment means to deplete the value based on the change in market factors. It is considered when the asset’s book value is less than its market value.Obsoleting technology – Machinery is highly dependent on the version of technology prevailing in the market. Hence, any obsolescence will lead to a change in the value.An asset sale is one of the most common scenarios in which an entity sells the assets either for replacement or diversification. The main thing one has to determine while recording the sale of an asset is the gain on sale, market rate, and stamp duty value.Change in the asset’s useful life – Many factors like depreciation, impairment, or capacity highly depend on the useful life estimate. Auditors should consider any change in the same judiciously. Also, taking professional or actuarial opinions while estimating the useful life will add to the authenticity of the estimates.Change in the statutory requirement to change the disclosure – Accounting of the assets always happens under the strict guidelines of IFRS, GAAPIFRS, GAAPThe International Accounting and Standards Board (IASB) issued IFRS, whereas GAAP is given by the Financial Accounting Standards Board (FASB). Though attempts are being made to bring about convergence, it becomes essential to be considerate when evaluating financial statements under the different frameworks.read more, and local laws. Disclosure and valuation will be dependent on these rules. Thus, any change in them will directly affect the disclosure and valuation of the statements.

Conclusion

Assets represent the investments that an entity owns, and by utilizing these, the company can meet all its future liabilities. Hence, it is of utmost importance to determine the value of assets and check the assumptions to calculate the same.

Previously, there have been several instances where the assets were misrepresented, and financial statements were window dressedWindow DressedWindow dressing in accounting refers to the intentional manipulation of financial statements by company management in order to present a more favourable picture of the company to users of the financial statement before it is released to the public.read more to obtain funding for financial institutions. Hence, while reading the assets in the balance sheets, one should read notes to accounts accurately, considering all the disclaimers provided byAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country’s local operating laws.read more auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country’s local operating laws.read more and the board of directors.

This has been a guide to what are Assets in Accounting. Here we discuss types and examples of assets in accounting, their limitations, and factors that affect the value of assets. You can learn more about accounting from the following articles-

  • Examples of AssetsTypes of Assets in AccountingDeferred Tax Assets Calculation