An asset is a property, possession or a resource of a business which helps it in the generation of the profits. The assets can be tangible or intangible and fixed assets or current assets. Tangible assets are the assets which have some physical existence, thus they can be touched, seen and felt. Intangible assets cannot be felt, seen or touched but they also help in the generation of the revenues. Let us now understand the Assets on Balance Sheet in detail.
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- Preparation of Trading Account
- Profit and Loss Account
- Liabilities on the Balance Sheet
- Manufacturing Account
Assets on Balance Sheet
In the accounting language, we can say that all the debit balances of Real and Personal Accounts are assets on balance sheet. We show them on the assets side of the Balance Sheet and can thus classify them as:
- Fixed Assets
- Investments
- Current Assets
Let us now discuss these in detail.
Fixed Assets
These are the properties, facilities or resources that a business owns for a long period of time. The firm purchases these assets not for selling them for gain but for using them to earn future profits. Also, the firm reaps the benefit from these assets for a long period of time.
The fixed assets can be tangible such as plant and machinery, land and buildings, furniture and fixtures, etc. also, they can be intangible such as patents, copyrights, trademarks, goodwill, etc. These assets are depreciable assets.
Thus, we show the fixed assets at original cost less depreciation in the Balance Sheet.
Investments
Investments are the funds or money that a firm invests outside business for a temporary period. It is prudent to invest the surplus funds which are not in use in the business immediately, with the outside agencies.
Usually, the investments are in the form of shares, securities, mutual funds, bonds, debentures, fixed deposits, etc. The business aims at earning extra income on these idle funds.
We need to show the investments separately in the Balance Sheet. Investments can also be current or non-current in nature.
Current investments are those that can be readily converted into cash and are not intended to be held for more than one year. Whereas, non-current investments are those which cannot be converted into cash or sold before a certain period due to a restriction on them being sold.
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Current Assets
Current assets are held by an organization for sale or consumption during its normal operating cycle. These are easily convertible into cash and are held only for a period of one year. These include
- Stock
- Debtors
- Bills Receivable
- Advances to suppliers
- Pre-paid expenses
- Cash-in-hand
- Cash at the bank
1. Stock
It includes the stock of raw materials, work-in-progress and finished goods. We show the stock at cost or market price, whichever is less in the Balance Sheet and Trading account.
Usually, a firm calculates the value of its inventory by physically counting it and then comparing it with book stocks for ensuring that there are no discrepancies.
The firm adjusts the discrepancies, if any, to Profit and Loss A/c, and shows the inventory at the net value after the adjustment.
2. Debtors
These are the personal accounts of the customers who have outstanding balances to be paid in their accounts. We deduct bad debts, provision for bad debts and provision for discount on debtors from the debtors and show the net debtors in the Balance Sheet.
3. Bills Receivable
These are the bills of exchange that the customers or debtors accept in favor of the firm. The firm shall receive the money from these bills on a future date and thus, these are assets of the firm.
4. Advances to suppliers
This is the amount that a firm pays in advance to the supplier or seller of goods for the purchase of goods. It gives a right to claim to the firm.
5. Pre-paid expenses
It is the amount that the firm has paid in advance in the anticipation of receipt of service in the near future. Thus, it is a current asset.
6. Cash-in-hand
It is the hard cash which a firm holds in physical form. This cash may be at any location or office of the business.
7. Cash at the bank
It includes the cash in all the bank accounts of business whether current account, savings account, fixed deposit or any other.
Question on Assets on Balance Sheet
What are the conditions that when satisfied, an asset is classified as a current asset?
Ans. An asset is a current asset when it satisfies any of the following conditions:
- The firm expects to realize it or intends to sell it or consume it during the normal operating cycle which is usually 12 months.
- The primary purpose of holding it is to trade it.
- It is due to be realized within 12 months of the Balance Sheet date.
- It is cash or cash equivalent and is not restricted to be sold, exchanged or used to settle a liability for at least 12 months of the Balance Sheet date.
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