Without assets, your business could not run. Everything from light bulbs and printer paper to buildings and equipment adds value to your business since these items facilitate the running of your operations and can help you to generate revenue. As a line item on the balance sheet, total assets represent the resources that your business owns at a given point in time. It's a crucial metric for determining your business' net worth, whether for sale or investment purposes.
TL;DR (Too Long; Didn't Read)
Calculate total assets by adding up the total recorded value of all the company's cash, accounts receivable, investments, inventory, fixed assets, intangible assets and anything else of value.
What are Assets?
Assets are anything of value owned by your company. Some assets are obvious because you can see and touch them – things like buildings, machinery, vehicles and computers fall into this category. Other assets are intangible but still create revenue for your business, such as domain names, accounts receivable and investments. As things of value, assets get recorded on the company's balance sheet. The company will record them at the time of purchase, so the balance sheet should always reflect what the company owns at a given point in time.
What are the Different Types of Assets?
Asset classification is a system for placing your assets into groups of like items, based on common characteristics. Companies typically will cluster these groups for reporting purposes on the balance sheet. Broadly, the categories in which assets may be classified include:
- Cash, including petty cash and cash in the bank.
- Accounts receivable, which is unpaid bills.
- Prepaid expenses.
- Inventory, including raw materials, work in progress and finished goods awaiting sale.
- Fixed assets such as real estate, vehicles, computer equipment and furniture.
- Intangible assets.
- Other assets.
Some businesses say that their employees are their most valuable asset. That may be true, but you can't put a value on your talented team, so employees don't feature on the balance sheet.
How Do You Record Assets on a Balance Sheet?
For reporting purposes, most businesses divide their assets into current assets and long-term assets. Current assets are things you're going to use up or sell within one year. Everything else is a long-term asset.
Within these two categories, it's conventional to list assets in order of liquidity. Liquidity refers to how quickly you can turn an asset into cash. Cash always appears at the top of the list of current assets, closely followed by accounts receivables, inventory and short-term investments. Also, a company will report prepaid expenses as current assets. For example, if you bought a year-long insurance policy and paid the premium up front, the portion that is not used up yet will be listed on the balance sheet. It's a current asset because you're going to use it up within one year.
The next section on the balance sheet is for long-term assets, which are also called "non-current" assets. This section features harder-to-sell items like real estate, vehicles and machinery. There are also some assets that you cannot see or touch, such as web domain names and product trademarks. These assets are called intangible assets, and you'll list them beneath your fixed assets on the balance sheet.
How Do You Calculate Total Assets?
Whenever the business buys an asset, it should classify and record the asset in the appropriate spot on the balance sheet. The line item will also record the asset's purchase value. Once you've listed all the assets, the sum of all their valuations gives you total assets. It really is that simple – no accounting equation required!
Why are Total Assets Important?
Lenders and investors are attracted to businesses with plenty of assets on their balance sheets since it shows you have a large portfolio of assets you can sell to raise money if times get tough. If you apply for new credit, owning cash accounts, inventory and substantial equipment show an ability to pay debt, even when your profit is modest. It also gives you lots of options for reinvestment and growth.
Knowing the total assets on the balance sheet also tells you how much money is tied up in the business. If your growth or cash flow is poor, but your total asset number is high, it could be a signal that you need to sell or transfer assets to reinvest and increase the efficiency of your business. In a similar vein, an understanding of total assets can help you achieve potential savings. Sometimes, leasing assets may be cheaper than buying them outright – calculating the total assets you're carrying can help you to figure out your tolerance for buying versus leasing.
If you are thinking of selling your business, one conventional method of valuation is to add up your total assets and deduct the value of the company's liabilities. Identifying assets and placing the correct value on them is crucial in figuring out your business' net worth in the event of a sale.
Depreciation of Business Assets
By now, you've probably noticed a key point about total assets: it represents the historical cost of the assets you own, not their market value. Over time, the value of an asset may increase or diminish due to appreciation or depreciation. In the case of buildings, the value of the asset may rise. In the case of vehicles or computer equipment, the value of the asset may fall as both wear and tear and obsolescence affects their value.
In accounting terms, you have to depreciate fixed assets over the number of years you're going to use them, a period that is known as the asset's useful life. A standard depreciation methodology involves writing off the purchase cost at a fixed amount, year-after-year, for each year of the asset's useful life. So if you bought a new vehicle for $30,000, you'd depreciate it at $3,000 per year for each year of its 10-year useful life. Most businesses will assign the same useful life to every asset in a particular category, for example, computer equipment. Doing so makes it easier to depreciate all the assets in this group.
What's the Change in Asset Growth Formula?
Looking at the total assets in isolation doesn't tell you very much, and it's much more useful to track the change in total assets over time. This can give valuable clues about a company's health and prospects. To calculate the year-on-year change in total assets, simply subtract last year's total assets from this year's total assets. Divide the resulting number by last year's total assets and multiply the result by 100 to see the percentage change. If the result is positive, then the total assets grew. If the result is negative, then the total assets declined. The higher the percentage, the greater the year-on-year change.
Here's an example. Suppose Company X had total assets last year of $150,000 and this year its total asset number is $220,000. The percentage change is (220,000 - 150,000)/ 150,000, or 46 percent.
Once you've done the math, the next step is to ask yourself why the change happened. Did you buy or sell a major fixed asset? Is there an increase in accounts receivable, and if so, does that translate to a rise in sales or have you dropped the ball in terms of your credit management? Do you have a customer who hasn't paid? Your total assets are a direct result of decisions and events that occurred. Understanding them can give you a better view of the overall health of your business.