Any business, no matter its size, owns and manages resources that have economic value. These assets may include trademarks, equipment, real estate, software, copyrights and more. They are recorded on the company's balance sheet and can be classified into several categories. As a business owner, you need to understand the difference between total assets and operating assets so you can manage your resources more effectively and maintain accurate records.
What Are Total Assets?
Whether you want to attract investors or determine your company's worth, it's important to have a clear picture of your total assets. These include any resources that your business owns, from buildings and properties to computer programs. They can be tangible or intangible, long term or short term, current or noncurrent and more.
Some assets, such as your business laptop, can only be used for a few months or years, so they have a relatively short lifespan. Others, such as real estate, provide long-term value and will generate income for years to come. You may also own intangible assets, including trade names, goodwill, patents and so on. A company's assets can be further broken down into several other categories and subcategories including but not limited to:
- Fixed assets
- Prepaid expenses
- Accounts receivable
- Cash and cash equivalents
All of these resources are referred to as total assets in accounting. They are not recorded as revenue on the balance sheet. Your company's revenue will appear on the income statement, while its assets will be listed in groups on the balance sheet in order of liquidity.
Assets vs. Revenue
The best way to understand the difference between assets and revenue is to think of a real-life scenario. For example, when an electronics store sells a TV, the transaction is recorded as revenue on the income statement. If the store purchases new display stands to showcase its products, those stands are recorded as assets on the balance sheet.
An asset is something owned by a company for business use and has economic value. You can use your assets to increase sales, streamline your operations, boost productivity in your organization and more. Revenue, by comparison, is money that your business earns from selling products or services.
Total Assets vs. Operating Assets
A company's assets can be classified into several categories based on their lifespan, usage, physical existence and liquidity. The ones you're using to generate revenue and conduct your day-to-day operations are considered operating assets. These can be broken down into:
- Fixed assets (buildings, equipment, furniture, land, etc.)
- Inventory (finished goods, raw materials, etc.)
- Cash (including bank balances, checks and bills)
- Accounts receivable (money from customers who have not yet paid for their purchase)
- Prepaid expenses (money paid in advance by your company, such as rent or insurance)
- Intangible assets (copyrights, trademarks, etc.)
Total assets include everything your company owns, while operating assets are those required for your core business activities. You may also own nonoperating or redundant assets, which are important for your company and its future needs but not for its daily operations. These may include any equipment you're not using, corporate bonds and others. However, you still need to report them on the balance sheet because they can act as a financial backup and generate revenue in the future.
In general, investors consider both the total and operating assets when evaluating companies. If you're trying to secure funding, it's important to maintain accurate records. This will put your business in a positive light and prevent accounting mistakes.