Understanding assets

Definition

Assets are the resources a business owns or controls that should bring in cash, goods, or services later. Cash, unpaid invoices, inventory, trucks, and software licenses all sit on this side of the books.

On the books, this is the left side of the Balance Sheet. It is not a liability, and it is not an expense; those live elsewhere.

Current assets are the ones expected to turn into cash or be used up within a year. Non-current assets are the ones the business expects to hold and use for longer than that.

The basic equation still holds: assets equal liabilities plus equity. If assets go up and you did not borrow, equity went up too, or another asset went down.

Where it shows up

Balance Sheet: Located at the top, above liabilities and equity.

P&L: Related to expenses that arise as assets are used up.

Cash flow: Increases in this section, reported cash from investing activities decreases.

See also: Balance Sheet · Current Assets · Non-Current Assets

When you look at your Balance Sheet, assets are the first block on the page. They sit above liabilities and equity, usually split into current and non-current groups.

A high asset total can mean a healthy cash pile, a lot of inventory, or a yard full of equipment. A low total can mean the business is small, or that it sold assets and has not replaced them.

The profit and loss statement does not list assets as a section. Depreciation, cost of goods sold, and similar charges show up there as the assets are used up.

Buying a long-lived asset usually shows up on the Statement of Cash Flows as an investing outflow. Cash falls, and the asset section of the Balance Sheet rises by the same purchase.

How it works

An asset gets on the books when the business pays for it, charges it, or earns the right to it. The debit hits the asset account; the credit hits cash, a payable, a loan, or revenue, depending on how it arrived.

Common asset lines and what moves them:

• Cash and cash equivalents: the easiest to see. They go up when customers pay and down when the business spends.
• Accounts receivable: goes up when you invoice a customer and down when they pay.
• Inventory: goes up when you buy goods and down when you sell them or use them.
• Fixed assets: vehicles and equipment go up when you buy them and stay on the books for years. Accumulated depreciation then slowly reduces the net amount as the asset is used.
• Prepaid expenses: cash already spent for something not yet used, such as a year of insurance. They sit as an asset until each month's share becomes an expense.

Assets leave the books when they are sold, collected, used up, or written off. The credit hits the asset; the debit hits cash, an expense, or another asset.

Keep a simple list of what you own. A truck that is not on the books is still an asset in the yard, and a truck that was sold last year should not still be on the list.

Example

A landscaping company buys a used pickup for $20,000 cash to haul mowers between jobs. The owner writes the check the same day the title transfers.

The company records:

Debit: Equipment $20,000

Credit: Cash $20,000

Equipment (an asset) goes up by $20,000, and cash (also an asset) goes down by $20,000. Total assets do not change; the mix does.

The Balance Sheet still balances. The P&L does not show the truck as an expense that day; depreciation will spread the cost over the years the truck is used.

Common mix-ups

Assets are not the same thing as cash. Cash is one asset; inventory, receivables, and equipment are assets too, even though you cannot spend them at the bank today.

Buying an asset is not the same as recording an expense. The truck is an asset until it is used up; the expense arrives later as depreciation, or as cost of goods sold when inventory is sold.

An asset is also not a liability. A loan that paid for the truck is what you owe; the truck is what you own.

Related terms

• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Current Assets: Assets expected to turn into cash or be used up within one year.
• Non-Current Assets: Assets the business expects to hold and use for more than a year.
• Cash And Cash Equivalents: Bank balances and near-cash holdings that can be spent immediately.
• Accounts Receivable: Money customers owe the business for goods or services already delivered.
• Inventory: Goods held for sale or used to produce goods for sale.
• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Asset Turnover: Revenue generated per dollar of assets held.