Beginner’s Guide to Reading and Understanding Assets on the Balance Sheet

On the balance sheet you have three major components, assets, liabilities and owner’s equity. In this article, we will understand the term asset and its components.

An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the company.

In simplified terms, Assets are simply things a company own out of owner’s capital or retained earnings or borrowed capital. Based on period of holding, it’s generally broken into short-term and long-term. It can further be classified into two more categories: tangible and intangible.

Short term

Short-term or current assets are those things a company owns that are expected to be turned into or used as cash within one year from the date of the balance sheet or in the operating cycle, whichever is longer.

It includes cash and cash equivalent, inventory, accounts receivables, inventories, prepaid expenses and short-term investments.

Long term

Long-term assets are those things a company owns that are not expected to be converted into or used as cash within one year. It’s also known as non current or fixed assets.

Companies charge depreciation on the cost of fixed asset to profit and loss account as expenses. Depreciation is calculated every year by allocating costs of acquisition over the useful life. Depreciation accumulated over the years is usually shown in the notes to financial statements.

It includes property, plant, equipment, furniture and fixtures, real estate, patents, trademarks, and long-term investments.

Tangible

Tangible assets are physical things that one can touch or hold, or feel. These are used in production of goods and services. It includes the machines, furniture and fixture, buildings, equipment, vehicles, computers, inventory and similar things.

Intangible

Intangible assets are those items which don’t have tangible qualities; for example, trademarks, patents, copyrights, stocks and bonds etc. This means it lack physical substance.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.