There are many different types of financials a person can look at to analyze their business. The most important of all financials is the balance sheet. The balance sheet provides insight of the businesses net worth. One of the most important parts of the balance sheet is called the ”assets”. There are various kinds of assets an entity can own and use in their daily operations. Assets are subdivided into different categories to distinguish them from each other. Current assets, long-term investments, fixed assets, intangible assets, and tangible assets are the categories used in balance sheet to categorize all assets.
Current asset is an asset which can either be converted to cash or used to pay current liabilities within 12 months. Typical current assets include cash, cash equivalents, short-term investments, account receivable, stock inventory and the portion of prepaid liabilities which will be paid within a year.
- Cash and cash equivalents – are the most liquid assets found within the asset portion of a company’s balance Sheet. This includes currency, bank accounts, and negotiable instruments (money orders, travelers check, and bank drafts).
- Short Term Investment – this account contains any investments that a company has made that will expire within one year.
- Receivables – a record of outstanding balances from the customers for the services rendered.
- Inventory – is considered an important asset for a business. The value of inventory reported on balance sheet is usually the historical cost or fair market value, whichever is lower. Different types of methods used to calculate the cost of inventory are FIFO (first in first out), LIFO (last in first out) or average of all products purchased within a time period to derive the cost.
- Prepaid expenses – expenses which are paid in advance and amortize over the period. Some of the examples are insurance, office supplies, rent, and utilities.
Investments made by the entity for a long term with no intentions to dispose in the near future. This group usually consists of three types of investments:
- Securities such as bonds, common stock, long term notes or treasury stock
- Fixed assets not used in daily operations such as land or buildings
- Funds such as sinking funds, hedge funds or pension funds
Fixed assets are often referred to as property, plant and equipment (PPE), used for daily operations and held for long term to earn profit in the company. Some of the assets that includes in fixed assets are land, machinery, equipment, tools, furniture, etc. Fixed assets are recorded on their actual cost or fair market value whichever is lower and depreciate over the life of the asset (with exception of land). Depreciation methods used in accounting are straight line, double declining or sum-of-years digits method. Entity discloses their depreciation method in notes to financial statements and accumulated depreciation appears on the front of balance sheet as a negative number reducing the value of fixed assets to the estimated value for the given period.
Assets that lack of physical substance and are hard to evaluate. Some of the intangible assets are copyrights, goodwill, patents, trademarks, trade names, etc. According to the US GAAP, with the exception of goodwill these assets are amortized to expense over the period.
Assets that have physical substance and can easily evaluate. Currencies, buildings, inventories, vehicles, and precious metals are considered to be tangible assets.