Assets are defined as resources of the company that have the following characteristics:
1. It is controlled by the company
2. Provides future economic benefits
3. Capable of reliable measurement
4. Arises as a result of a past event
For example, Inventory is recognised as an asset because:
1. It is controlled by the company, as the company has the right to sell the inventory as it chooses
2. It provides future economic benefits, as it can be sold to generate revenue in the form of an inflow of credit or cash
3. It can be reliably measured (By its cost to be produced which can be verified by a source document)
4. It arises from a past event (Transactions relating to the purchase of raw materials, labour and other expenditure required to produce the product)
The balance sheet divides Assets into two categories, current assets and non-current assets:
Current Assets are assets which are not held on a continuing basis. They include cash and other assets which are expected to be consumed or converted into cash within the next twelve months or within the operating cycle. For example, accounts receivable is recognised as a current asset because it is expected to be converted into cash within the operating cycle. For the same reason other accounts such as inventory, rent receivable and accrued revenue are recognised as current assets.
Non-current assets are assets held for the intention of being used to generate wealth rather than being used for resale. In this sense they are held on a continuing basis. The obvious non-current asset is Property, Plant & Equipment (PP&E). PP&E are tangible long lived assets that are held for use in the production or supply of goods or services, or for administrative purposes. Machinery would be classified as a non-current asset because it is not held for the intention of re-sale, but to assist in efficiently producing the company’s inventory.
Below is an example of categorising assets:
A company has the following assets at year end:
- Cash ($5000)
- Inventory ($2,000)
- Accounts Receivable ($5,000)
- A loan to company B ($10,000) of which $2,000 will be received in the next 12 months
- Property Plant and Equipment of $100,000 of which a building worth $15,000 intends to be sold in the next 12 months
- The company provided advisory services ($1,000) which was billed out the day after the year end
Balance Sheet:
Hi there. After working through the example myself, I really wondered why advisory services ($1000) provided by the company during the year is left out of the Balance Sheet, does it mean that the $1000 is already included in the accounts receivable of $5000?
Thanks for your help.
Kat,
This seems to be a mistake. I don’t know why it is not in there! Very weird. It should be recorded as accrued revenue = $1,000