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How Do Assets Work? Different Asset Types: How Do They Help Small Businesses Grow?

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Posted on
Jul 26, 2022
Different type of Assets

Introduction 

 A company’s balance sheet is the basis for evaluating its performance. There are two parts to a balance sheet: assets and liabilities. When assets are more than liabilities, it conveys a strong balance sheet. We can use the word assets in the literal sense as well as in accounting. Generally, when we say someone is an asset, it means that person is important. Like, who is the asset of a company? It’s the company’s employees. Without them, the business won’t be successful. That’s why there is so much focus on employee benefits. 

The assets definition business-wise is a little different. In accounting terms, business asset, which refers to the assets owned by the firm, represents the net worth of the firm. It shows the investors the viability of a business. 

In this article, we will explain the meaning of assets of company, the types of assets, and how the profit of asset selling is identified in accounting.  

What are Assets in business?

The assets are things that the company owns. The company is in control of its assets. Assets are resources controlled by a firm based on past events that may produce future economic benefits. An individual owns his assets. However, since the company is not a person, who owns these assets? Is it the shareholders?

The company may not be a human being. However, it is considered a separate legal entity. Hence, the assets of any company are owned by the company only. The assets of a business consist of raw materials, machinery, properties, land, and intangibles like royalty. Based on the physical existence, convertibility in cash, and usage, there are different categories of assets. The classification is necessary for proper accounting and risk analysis.

How do assets help to grow business?

 Assets play a crucial role in making your business thrive. Here are some ways they drive your business growth.

  • In business, we require funds from time to time for expansion, maintaining inventory or simply day-to-day operations. Before lending, lenders ask, “Which are the things that the company owns?“. It helps lenders assess the repayment abilities of the company. 
  •  If company assets are enough to cover the outstanding liabilities of a business, it shows that this business is solvent. It improves the image of the company and attracts shareholders and investors.
  • The Deferred tax assets lower your taxable income. These are the fixed assets that show on your Balance Sheet if you have overpaid the tax. Thus, these give tax relief.
  • If you have workers in a factory, you must take care of health rules and maintain your machinery. Taking proper care of machinery can help you reduce the risk of health hazards, unforeseen accidents, and any possible suits in the future.

What are the different categories of assets in an organisation? 

Based on convertibility, the assets of the business consist of Current Assets and Non- current Assets. Current assets are liquid assets. It means we can convert them into cash within a year. Thus, we don’t have to worry about funds. Non-current assets, on the other hand, are assets that we can not convert into cash. They are fixed assets, non-current investments, long-term loans, and advances.

Here is an overview of the different types of assets required for a small  business :

A. Non-Current Assets 

  • Fixed Assets: Purchasing a factory, warehouse, or machinery is one of the first steps in starting a business. These investments are not for single-day use but for the long term. So, what type of asset is machinery? Any assets owned by the business that contribute to business operations and have a useful life of over one year are known as fixed assets. A Fixed Asset is purchased in an organisation because of its crucial role in generating income for the company. It is not for consumption or investment purpose. Whenever we need to value a business or obtain accurate financial information, we value its fixed assets, also called capital assets. Fixed assets are valued on their book value or replacement cost. Now, there are two types of fixed assets : 
  • Tangible fixed assets: These are the fixed assets which have a physical existence. We can touch them. Examples are machinery, vehicle, buildings and office furniture. 
  • Intangible fixed assets: These are the fixed assets that do not have a physical existence. We can not see or touch them. However, they are equally valuable. Examples are royalties, Goodwill, software, licenses and copyrights. 

B. Current Assets

  • These assets provide an insight into the liquidity position of the company. It is necessary to pay off regular payments and any short-term financial obligations. These include current investments, inventories, trade receivables (debtors), short-term loans and advances, and cash and cash equivalents. 

How are the profits of assets selling identified? 

If the sale price of an asset is more than the net book value, we have earned a profit on the sale. The sale proceeds go on the credit of the asset account, and the gain goes into the profit and loss account.

To answer how the profit of assets selling is identified we need to know how different assets are valued. 

S.noTypes of assetsIdentification 
1Tangible fixed assetsAt Net Book value
2Intangible fixed assets (excluding Goodwill)Either based on
– Market evidence
– The present value of future earnings from the asset
– The cost of constructing or acquiring an intangible asset
3GoodwillValue of business equity less net value of assets

Final thoughts

The above article gives you an overview of the assets of the company. However, even if you want to wind up your business, the assets valuation helps you determine the correct net worth of your business and gets you the right price.

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