What Is an Asset?
If you take a look at your company’s balance sheet or the balance sheet example found in our Media Gallery, assets fall into two categories, current and fixed. Think of current assets as something you could turn into cash quickly or within a reasonable amount of time.
Current assets include items such as:
- Accounts Receivables
- Prepaid Expenses
Some financial experts also think of notes receivables as a current asset, but only if the note is a short-term note receivable, say shorter than 60 days, but no more than 90 days.
There are also fixed assets that are considered assets that cannot be readily turned into cash. These include equipment, vehicles, furniture, fixtures, land, and any buildings you own, lease or finance.
Unlike current assets, fixed assets either appreciate in value such as land, or depreciate in value such as vehicles and equipment.
Why Are All Assets Equal?
While all of your assets, current and fixed, help to determine your company’s value or net worth, current assets are often looked upon by lenders and investors as cash, or assets that could be turned into cash.
Lenders and investors also look at current assets as a company’s true worth. Because cash is king, the more actual current assets you have, the better your business financial standing appears.
Banks and investors will also look at fixed assets but from more of collateral standpoint. A bank or investor could lien a fixed asset, but current assets, which can change daily, are often hard to lien or use as collateral unless your company is extremely large.
The Importance of Keeping Track of Current Assets
It’s important to keep track of your current assets. Failing to do so, especially with notes or accounts receivables can turn the actual value of your current assets sideways before you know it. Consider examples of current assets gone awry this way:
- Cash – If you don’t keep good records of cash in and cash out through appropriate journal entries, your cash could be under, or worse, overstated.
- Accounts Receivables – Every person or company that owes you money should be tracked or what is called in the financial accounting world, scheduled. Accounts receivable schedules are set up in a way that shows the customer’s name, how much they owe, both current and past due. For easy review of an accounts receivable schedule, customers are controlled by account numbers. If a business owner doesn’t review accounts receivable schedules monthly to see what accounts are past due, accounts that are delinquent could turn a current asset into a bad debt.
- Inventory – Again, inventory is often controlled and kept track of in a schedule form. Too much or too little inventory can make or break a business especially if you don’t really know how much you have in stock.
A good example of current assets tracking would be if you wanted to sell your business and suddenly realized you had no idea of how much cash you had, who owed you money or how much inventory you had in stock. Your balance sheet might have incorrect summary totals for current asset accounts if they are not tracked, reconciled through the trial balance and if journal entries are ignored or missed.
Part of understanding the financial accounting world is knowing the different types of assets, including these basic examples of current assets.