- What is an asset?
- How to identify assets?
- Types of assets?
- How to calculate assets?
- What is the debt to asset ratio?
- How to calculate return on assets?
- What did we learn?
What is an Asset?
Asset is a tangible or intangible resource of financial or economic value that an individual or a company holds. In accounting and bookkeeping, an asset will provide a future benefit to the person or organization that owns it.
How to identify assets?
For something to be an asset, it has to satisfy three requirements:
- It has an economic benefit
- It's something you have control over
- You have acquired as a result of a past event.
Example of identifying an Asset
Let's say you get a new car for $5000, which you then put out for Uber cab services. Let's see if this $5000 car fits the requirements to be an asset.
- Does it have economic benefits?
Yes. You have put out your car forUber and will be earning an X amount. This means that you are having economic benefits from your investment.
- Is it something you have control over?
Yes. You paid for the car. You can keep it. You can sell it. You can do whatever you want with it.
- Have you acquired control of it as a result of a past event?
Yes. In this case, you going to the car dealership, and paying the $5000 for the car qualifies as a past event.
Assets vs. Liabilities
In simple terms, assets are property owned by an organisation or an individual while liabilities mean the amount owed in debt or to other entities. Here is a infographic from wallstreetmojo that brings out the primary difference between assets and liabilities
Examples of assets and liabilities
What are the various types of assets?
Assets are a part of the balance sheet and are distributed into three main types, which is based on three main parameters
1) On Convertiblility
Categorizing assets on the basis of their conversion to cash such as current assets and fixed assets.
Current assets: Assets that can be conveted into liquidity within a period of a year
Fixed assets: Assets that provide a long term benefit to the owner but can not be converted into cash immidiately
2) On Physical Existence
Categorizing assets based on how tangible or intangible they are. Here is the list of Tangible and Intangible assets
|Tangible assets||Intangible assets|
|Cash, currency and coins||Intellectual property|
|Houses and cars||Patents and copyrights|
|Real estate and land||Franchise or lease agreements|
|Precious metals and precious stones||Trademark and trade names|
|Equipment, machinery, and office||Accounts receivable|
|Artwork and collectibles etc.|
3) On Usage
Categorizing assets basis their usage/purpose for business operations such as operating assets and non-operating assets.
As the name suggests,operating assets is a class of Assets that are required in conducting of the daily opertions of the business like cash, machiner, plant etc are called operating assets
Non Operating assets:
A non-operating assets are the assets that are not required for the daily operations of a business. Like a pice of vacant land or some unused machinery.These assets have value but are not contributing to the daily operations of the organisation.
How to calculate assets?
Calculating assets is a simple way for a small business owner to know if they can repay their debts while also giving an idea of the organization's overall health. At the same time, a potential lender would also look into what assets in accounting a company has. The lender looks at these assets to know if they can be used as leverage or guarantee for a new loan.Let's take a look at the steps on how to calculate your assets.
List your assets
To calculate the assets, you first need to know what assets you or your organization currently have. You can identify your assets with the three requirements mentioned above.
Begin by listing the value of all your current assets (ones that can easily be converted to cash), like money owed to you, liquidity on hand, and inventory.
After that, move on to list the value of fixed assets (which are harder to convert to cash), like machinery and buildings. Long term investments such as stocks and bonds should also be listed according to their value.
After this, the final step is to calculate the value of intangible assets (mentioned above).
Make a balance sheet.
A balance sheet is a financial statement that shows an organization's net worth and assets and liabilities. We have already covered the balance sheet and how to prepare the balance sheet in great details on our blog. To understand more on balance sheet you can read our article a step by step guide to understand and reading balance sheets
Add up your assets
If you are doing it manually, you need to add up your assets in a template in, say, an Excel. A free asset calculator can help you with that. For example, a plumber has $6000 in cash in his bank account. Meanwhile, he hasn't billed $4000 for an ongoing job (the contract is worth $7000, and he has already charged $3000). He also has another job worth $2500 lined up, while having equipment worth $1500 and investments worth $3200.
His total assets then would be the overall sum of $6000 + $4000 + $3000 + $2500 + $1500 + $3200, that is $20,200.
Check the accounting formula.
In accounting, there is a formula to check the financial health of a business. This same formula can be applied to verify the legitimacy of the sum figure of your total assets.
This is the formula:
Total liabilities + Equity = Total assetsThe total net worth of an organization is equity, while liabilities are what a business owes, such as operating expenses, business loans, or owed taxes.
If the above-given equation doesn't work and shows you the incorrect figure for your assets, you need to double-check it.
What is the debt to asset ratio?
Debt to asset ratio is a figure that shows how much of an organization's assets were bought with borrowed money. For example, when a laptop meant for the business is purchased on a line of credit.
The ratio is a sort of percentage. A higher rate of debt to asset ratio means that a more significant number of an organization's assets are purchased through debts. This could be problematic for a business. This can cause the company to be at a higher risk of filing bankruptcy or insolvency.
The formula to calculate its ratio is:Total liabilities / Total assets = Debt to asset ratio
A small business organization has total liabilities of $2000 and total assets of $4000.$2000 / $4000 = 0.5 or 50 percent.This means that the organization has a debt to asset ratio of 50 percent.
How to calculate return on assets
`The ROA or return on assets formula tells an individual how much profit is generated after tax for each dollar held in assets. ROA can be calculated in two ways:
Net income / Average assets in a period = ROA
Net profit margin x Asset turnover = ROA
The first method is more straightforward, so let's take a look at that here. If a company has a net income of $75000 and the average assets are worth $400,000, then the ROA will be $75000 / $400,000 is 0.18 or 1.8 percent.What did we learn?While understanding what assets are is relatively simple, it is challenging to keep a continuous track of all your company's assets. This is why many entrepreneurs and business owners choose accounting software, such as Deskera, to ease the process of asset calculations.