What are Asset Accounts?
An asset account is a category within a company’s general ledger account that shows the value of the assets it owns.
Generally, asset account balances are debit balances. This means they are increased with a debit entry (the left side of a T-account) and decreased with a credit entry on the right side of the account balance.
So what are assets? Put simply, assets are items or resources that are owned by companies. These resources are expected to give economic benefits to companies. In other words, an asset is used by a company to generate future revenues or maintain business operations. The prime reason why businesses operate is to generate revenues and make profits. Assets are the resources that allow companies to make these revenues.
Asset accounts are categories within the business’s books that show the value of what it owns.
A debit to an asset account means that the business owns more (i.e. increases the asset), and a credit to an asset account means that the business owns less (i.e. reduces the asset).
Some asset accounts will be for capital assets and others for current assets.
Asset accounts in double-entry bookkeeping
In double-entry bookkeeping, there are five types of nominal accounts:
- Income accounts: what the business has earned
- Expense accounts: the business’s day-to-day running costs
- Asset accounts: what the business owns
- Liability accounts: what the business owes
- Capital accounts: what is owed to or by the business owner.
How debits and credits work for different accounts
To increase the amount in your business accounts, you need to debit some accounts and credit others. What you do depends on the kind of account you’re dealing with:
- for an income account, you credit to increase it and debit to decrease it
- for an expense account, you debit to increase it, and credit to decrease it
- for an asset account, you debit to increase it and credit to decrease it
- for a liability account you credit to increase it and debit to decrease it
- for a capital account, you credit to increase it and debit to decrease it
Asset Accounts Example
Let’s say an agriculture company purchases land for $100,000 in cash. In this example, the company will account for both an increase and a decrease in assets. Why?
The purchased land is a non-current asset and the land account of the general ledger with be debited with $100,000.
At the same time, the company’s cash (a current asset) is decreasing in value and the account will be credited with $100,000.
Assets, like liabilities, can be separated out into non-current and current assets. Let’s take a look at each type of asset and give some examples of them.
Non-current assets are those assets that have a life of more than a year. These assets are, therefore, long term investments of the company and are generally illiquid. To make it simpler, converting such assets to cash is rather difficult. These assets also depreciate over their useful life and are tailored to meet the long term needs of the company.
Non-current assets can further be divided into tangible & non-tangible assets. Non-Current assets are normally valued to cost and are subject to depreciation & amortization throughout their lifespan.
Tangible assets are also known as fixed assets. As the name suggests, such assets are physical or can be touched. Some examples of tangible/Fixed assets are as follows:
- Land/Land improvements. Land can either be owned or operated on rent. If the land is owned it is considered as a non-current asset. The value of land is extremely high, and they are highly illiquid. The land is the pre-requisite of starting any business. Any improvements made to the land are also classified in the land account.
- Buildings. The cost of acquiring or construction comes under buildings. For most manufacturers and service providers buildings are a must. Manufacturers need factories to manufacture while service providers such as banks and insurance companies need office buildings to cater to their clients.
- Machinery/Computer equipment. Once buildings have been constructed on land, machinery is required to operate a business. Again, a manufacturer would need machines to produce goods. On the contrary, service providers would need computers and other equipment to satisfy their customer’s demands.
- Furniture and fixtures. Furniture & fixtures include desks, chairs, tables cupboards, fittings & racks.
Not all assets are physical. These assets fall in the category of intangible assets and are as follows.
- Data. With the recent influx of technology, data has gained tremendous value. Digital marketing along with social media platforms such as Instagram, Facebook & Snapchat has created a demand for consumer data. Data owned by companies are considered valuable assets. Facebook acquired WhatsApp in February 2014 for a whopping $16 billion. The rationale behind the massive acquisition was date alone.
- Brand name. Brand name or goodwill also holds substantial value. A powerful brand name allows the company to easily charge higher prices from their customers. Brands such as Apple, Coca Cola, and McDonald’s are extremely powerful.
- Patents. Most companies obtain patents for spending substantial amounts in research & development. These patents have massive value and protect companies against competitors who may try to copy the design, idea, or logo.
Current assets are also considered as short-term assets. Unlike Non-current assets, these assets can easily be converted to cash within a year or less. These assets are used to finance short term financing needs. Hence, such assets help companies in their day to day operations. These assets are also valued at market prices rather than cost. Some common examples of current assets are cash.
- Cash in hand. Cash is the most liquid asset a company can own. Cash is cash itself and there is no question of converting it. It is a general and readily acceptable medium of exchange.
- Cash in the bank. Cash in the bank is not quite as liquid as cash in hand as it has to be withdrawn from the bank either through cheque or debit cards.
- Inventory. For most manufacturers, stock or inventory are also current assets. Manufacturers trade inventory to obtain cash. Inventory for most manufacturers is liquid as it can be sold in less than a year. Most automobile companies launch new models every year, which implies that they were able to sell old stock last year.
- Accounts receivable. Companies also sell goods or inventory on credit. These debtors or accounts receivable buy goods with the promise of paying at a later date. Bad debts, at times also result due to this asset. Companies normally create a provision for such doubtful debts.
- Notes receivable. Notes receivable are promissory notes allowing the company to collect amount with addition to interest on an amount lent. Note Receivables may be collected within one year of their issuance.
- Marketable securities. Marketable securities are examples of short-term investments that are made by a company. These securities are easily marketable and converted to cash. Examples of such securities may include T Bills, notes & equity securities.
- Prepaid expenses. Companies often pay bills and expenses in advance. When companies pay in advance, they in effect are paying for the services that may be utilized later; hence a current asset is created.
As discussed initially, assets are items or resources that bring in more money for a company. Therefore, companies must have a strong asset base. A company with a strong asset position is considered as a healthy company. It attracts numerous shareholders by giving out a good impression.
Financial planners must also constantly strive to bring the right balance between assets and liabilities. The right quantity of assets is required to finance liabilities. Companies with high liabilities and low assets can go into grave financial turmoil and suffer immensely.
Frequently Asked Questions
What are asset accounts?
Asset accounts are financial accounts that represent the various assets of a company. An asset account is a category within a company’s general ledger account that shows the value of the assets it owns.
What are the types of asset accounts?
There are a few types of asset accounts, which include cash in hand, cash in the bank, inventory, accounts receivable, notes receivable, marketable securities, prepaid expenses, and other current assets.
- Cash. Includes bills and coins on hand, such as petty cash.
- Bank deposits. Includes cash kept in depository accounts.
- Marketable securities. Includes both debt securities and equity securities, as long as they can be liquidated within a short period of time.
- Trade accounts receivable. Only includes receivables from the organization’s customers.
- Other accounts receivable. May include an array of miscellaneous receivables, especially advances to employees and officers.
- Notes receivable. Includes notes from other parties. A common source is accounts receivable that have been converted into notes.
- Prepaid expenses. Includes any prepaid amounts that have not yet been consumed, such as prepaid rent, insurance premiums, and advertising.
- Other current assets. Includes any minor items not readily classified into one of the preceding accounts.
- Raw materials inventory. Includes materials that must be converted into their final form through a production process.
- Work-in-process inventory. Includes goods that are in the process of being converted into salable items.
- Finished goods inventory. Includes items that have been manufactured and are now ready for sale.
- Merchandise inventory. includes goods that were purchased from suppliers in a ready-for-sale condition. This account is most commonly used by retailers.
- Buildings. Includes the constructed or purchased cost of all buildings owned by the firm.
- Computer equipment. May include not only computer equipment, but also the cost of more expensive software packages.
- Furniture and fixtures. Includes all furniture owned by the business.
- Land. Includes the cost of all land owned by the business. This account is not depreciated.
- Leasehold improvements. Includes the cost of all improvements made to property being leased by the company as the lessee.
- Machinery. Includes the cost of production equipment, conveyors, and so forth.
- Office equipment. Includes the cost of such office equipment as printers and copiers.
- Vehicles. Includes all vehicles, forklifts, and related equipment owned by the business.
- Accumulated depreciation. Represents the cumulative total of all depreciation charged against fixed assets. This is a contra account, and so is paired with and offsets the other fixed asset accounts.
- Broadcast licenses. Includes the cost to obtain broadcast licenses.
- Copyrights, patents, and trademarks. Includes the costs incurred to obtain these assets.
- Domain names. Includes the cost to acquire Internet domain names.
- Goodwill. Is comprised of the acquisition cost of an entity, less the fair value of all identifiable assets. This account is reduced by the amount of any goodwill impairment detected by the accountant.
- Accumulated amortization. Represents the cumulative total of all amortization charged against intangible assets. This is a contra account.
What are the key properties of an asset?
The key properties of an asset are that it is useful, durable, and has a certain value.
The usefulness of an asset is self-explanatory. The durability of an asset means that the asset will last for a certain amount of time. And, finally, the value of the asset means that it can be sold or exchanged for money.
How do I know if something is an asset?
Not everything a company owns is an asset. For something to be an asset, it must meet the three key properties mentioned in question 3. Additionally, an asset must be able to generate cash inflows for the company. Typically, assets are categorized within a company’s general ledger account.
What is the importance of asset accounts?
Asset accounts are important because they represent the financial foundation of a company. A company must have a strong asset base in order to be successful.
Additionally, asset accounts are used to measure a company’s financial health. Financial ratios, such as the debt-to-equity ratio and the current ratio, use asset accounts to calculate the company’s financial position.