There are many reasons a decrease in an asset account can occur. Most decreases are due to the normal operations of a company. Current assets are liquid and are sold or exchanged for other assets regularly. However, there are times when a decrease in an asset account can indicate a financial or operational problem in a company.
Types of Asset Accounts
Assets on a balance sheet are divided into three main categories: current, capital and other. Current assets are both cash and assets that are expected to be converted to cash within the next 12 months. For example, inventory converts to accounts receivable when a sale occurs. Accounts receivable then converts into cash when it's paid. Capital assets are more permanent in nature and include equipment, property and any receivables that are not due within the next 12 months. Other assets are those that fit into neither of the previous categories. Common assets that fall into this category are purchased goodwill and patents.
Decreases in current assets occur all the time. The cash balance in a company rises and falls based on inflows and outflows of operational cash and financing activities. A decrease in an asset is offset by either an increase in another asset, a decrease in a liability or equity account, or an increase in an expense. An example of the first is an inventory purchase. Cash decreases while inventory increases. An example of the second is a loan payment. Cash goes down by the amount of the payment while the total amount owed also goes down. An example of the third is a sale of inventory. The inventory balance decreases and the cost of the goods sold account increases.
Decreases in capital assets can occur for several reasons. The main one is the sale or decommission of capital assets. If a company sells one of its transport trucks, the cost of the truck minus depreciation will be deducted from the capital asset account while either cash or loans receivable increase. The difference between the net purchase price and the sale price is a gain or loss on sale. If there are long-term receivables on the balance sheet, they will decrease as payments are made.
Decreases That Can Indicate Problems
There are some balance sheet decreases in assets that can indicate an underlying problem and should be investigated further. One is a long and sustained decrease in capital assets. While it may mean that a company is able to produce revenues with fewer assets, it is more likely to mean that the company is not replacing its capital assets, which can indicate a cash crunch and, potentially, a long-term decline in revenues. Another is a decrease in accounts receivable with a corresponding increase in inventory. This can indicate that sales are slowing and inventory balances are building -- a situation that needs to be analyzed thoroughly in order to boost sales.
Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.