Company assets explained and how to classify them in your business!
When looking at a balance sheet, the first thing that you will always see will be assets. Assets are anything that a company owns that may have value and break down in multiple different ways; Current Assets, Other Current Assets, Fixed Assets, and Other Assets.
These all show and provide different information to correctly classify your business. For example, contractors can often have many assets between their vehicles, equipment, inventory, tools, and accounts. These require proper classification so that businesses understand what they are looking at. The best way to look at assets is on a scale of liquidity, not financial liquidity, although that is also one way, but physical liquidity, whether it is a liquid or solid or somewhere in between.
The first asset type we have is Current Assets. This is anything that is fully liquid or money you could spend today. Most of the time, this will be your bank accounts: checking, savings, or money market; since money is there today and can be spent today with no problem, hence Current Assets. This is the best type of asset that you can have because it is immediately available for you to use with no waiting period or need to sell.
Other Current Assets
Next, we have Other Current Assets. These are still highly liquid but a little bit thicker of a liquid. Think rather than water, more like soap. These will be things like your Accounts Receivable or money owed to you by your clients, Inventory which you could easily sell to make money, if necessary, or investments. Those investments could break down into multiple things like investments in other companies.
Let’s say you are an HVAC company opening a plumbing company and invested in that. It could also be that you invested company money into the stock market or bond market like a standard investor. This is actually something very common to see in larger companies that have a significant asset value. You could also have loans that you have made to others that could be paid back or will be paid back. All of these are things that you could easily cash in on, if need be, in a few days.
The final assets that live here are Undeposited Funds, the money you have received but have yet to take to the bank, and pre-paid expenses. Pre-paid expenses could be for insurance, utilities, etc., that you either don’t have to worry about paying or could request a refund if necessary to get some cash in a few days. Other Current Assets are ultimately super easy to get value out of, but rather than having it today. It may be tomorrow that you see that cash value come to you.
Fixed Assets follow up as the most viscus asset that you have. It is not quite frozen solid like ice but is at a slushy stage where it may take some time to get value out of everything. Fixed Assets will generally be the most extensive set of assets that you have, including buildings or land that the company owns, vehicles or trailers, or large machinery. These have practical value and could also be sold to make money for the company. There will always be a monetary value for these things.
Other Fixed Assets include furniture, tools, major software investments, computers, etc. Ultimately, almost anything you buy could be considered an asset.
So that brings up a great question; what is an asset vs. an expense?
This is a tricky question, and every accountant has a different rule of thumb as there is no direct guidance from the IRS on this situation. Working with contractors, I know how hard they can be on their tools and equipment, and even furniture sometimes. Going out and buying small tools like screwdrivers, wrenches, and even drills, I rarely consider an asset for my clients since it is bound to get lost or broken within a year. Larger tools, though can, and should, last longer. As such, my general rule for most clients is that if you are going to use it for at least three years and it cost you more than $1000, we can call it an asset. Some clients choose to use a higher or lower-level, others I change my rule for since they may not fit that mold of the average client, depending on their business and business type.
With your Fixed Assets, many of them depreciate or lose value. For example, going to buy a truck today, the minute you drive off the lot, that truck is no longer worth what you paid for it. The longer you use it, the further you drive it, and the harder you are on it decreases the value of that truck, and we need to recognize that decreased value. Furniture, tools, and other equipment all do the same thing.
Ultimately almost everything loses value. This leads to most, if not all, Fixed Assets having an accumulated depreciation account to record that too. This account can help you understand what that asset is actually worth, but that is not the case more times than not.
This enables you to understand the book value of an asset, or what we tell the IRS it is worth. Assets can be deprecated all at once or be depreciated over several years. We need to understand, according to your taxes and the IRS, what your assets are valued at. Why may you ask? Because depreciation is a tax write-off, it reduces your income in the year that you incur the depreciation, so we have to show on the books that same loss in value so that anyone financing or buying the company also understands that.
The final asset type is Other Assets. These are ultimately the most solid assets, and there is no real way to get any value out of these without making a drastic change. These assets are basically frozen solid or ice. Many businesses will not have assets like this and can honestly glaze right over this. However, security deposits you put on a building, licenses that you buy that transfer with the company, or costs in starting the business could all fall under this area. Again, conclusively without ending your lease or selling the business, there is no easy way to get any value out of these assets.
Assets are just one portion of the balance sheet. You need to make sure you understand the whole situation, so make sure you join us in learning about liabilities or read our balance sheet.