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All About Assets
Think of assets as resources. They are the things that, in the normal course of business, could be converted into some type of means to pay for something. Obviously, cash is an asset—but you knew that! Assets can be tangible or intangible, but either way, they are something that can be owned or controlled, and they represent the value of the organization. Some assets are easily converted into a means of payment, but others have a slower rate of conversion.
Current assets could include such things as cash on hand, negotiable instruments, short-term investments, bank accounts, marketable securities, receivables, inventories and prepayments. Current assets are “current” because they can convert into disposable funds relatively quickly.
Such things as unexpired insurance, prepaid rent or prepaid salaries are also current assets, because they are claims about services to be rendered in the near term, although paid for in advance. Current assets can be converted to cash, sold or consumed in an operating cycle (such as in a year). Net current assets are the working capital of the organization.
Fixed assets could include investments; land; resources that can be depleted; the factory/plant/building and improvements, structures and equipment thereon; bond issue cost; and costs of promoting and organizing the business/organization. Investments are included in the list of fixed assets because they may be long-term items, to be sold later than the current operating cycle, or only after a change of policy. Fixed assets are generally items that will remain or last more than a year.
Intangible assets might include franchises, patents, copyrights, computer programs, trademarks, trade names, secret processes/formulae or goodwill—the non-physical things that give value to an organization. Their economic life is not always predictable (such as with goodwill), but they are “valuable” to the organization and are assets to be amortized through time (except goodwill).
Determining the “life” of an asset is something that might involve the help of a certified public accountant, management, Internal Revenue Service guidelines, and/or the tax basis used for accounting. Among the elements considered for the “usefulness” of the life of an asset are disclosure, simplicity, comparison to other similar items and materiality. “Usefulness” of the life of an asset is important to calculating depreciation of that asset.
For example, if you buy a calculator (an asset), you are probably going to keep it for more than a year. However, it is not an item that is meaningful enough to calculate its “useful” life because it is a small, relatively inexpensive item. Therefore, the materiality of the calculator comes into play. So, in accounting, it may be listed as an expense or a “supply.”
Now, if an item is a costly one, it is more likely to be considered an asset, and depreciation must be determined. In all practicality, there needs to be some kind of “threshold” based on the dollar amount and the “useful” life of an item to determine, for accounting purposes, whether it is merely an expense or supply, or an actual asset.
Condition of maintenance, the extent of wear or deterioration of fundamental parts, the relative operating cost and potential obsolescence all factor into determining the condition of fixed assets. Sometimes it is even simple logic—a new unit, during a given period, will probably provide more service than an old one that is frequently out of service for repairs.
The benefit of an asset is that it, by itself or in combination with other assets, contributes to the cash flow, profitability, or ability to provide services of the organization. In effect, an asset is equal to equity combined with liabilities, so it is not merely “ownership” of the asset.
The value of an asset and its ability to contribute to cash flow is gauged by accounting that monitors such things as purchasing, licensing, servicing, upgrading and disposing of the asset.
Stephenie Slahor, Ph.D., J.D., writes in the fields of law enforcement and security. She can be reached at firstname.lastname@example.org.
Published in Law and Order, May 2011
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