Assets are the things you can identify as yours. These are the usual things like your cash account, things you buy and hold onto for later re-sale, buildings, furniture, tools, vehicles, etc. These assets are categorized as current, long-term or fixed assets. In addition to tangible things like these, there are intangible things like accounts receivable, notes or loans receivable, copyrights, goodwill (which may come with the purchase of a business), prepaid items like rent or insurance. Let's take a look at these in greater depth.
Current assest - assets that can easily be converted into cash - are also referred to as liquid assets. These usually are expected to have a life of six months or maybe up to a year. Checking and savings accounts, petty cash, accounts receivable, inventory, prepaid rent, prepaid insurances, investments, such as CD's or annuities, notes/loans receivable that will mature within the terms of a current asset and inventory are considered current assets.
Long-term assets are expected to have an extended life. If you loan a large sum of money to someone and give them several years to pay it off, the part that will be due beyond the current terms is considered long term. Goodwill, property such as artwork or maybe a valuable stamp or coin bought as an investment to be held for an extended amount of time, CD's or annuities with a maturity several years out, are considered long-term assets.
Fixed assets, sometimes known as plant assets, would be items that are part of your day-to-day functions. These will be the office furnishings, tools, vehicles, fixtures, A/C units, cars or trucks, computers, production machinery, construction equipment, etc. These are depreciated (reduced in value due to wear and tear) and assigned a new value. This is how it works. If you buy a desk for $1,000 and expect it to last five years, one fifth of the $1,000 is written off as an expense - reducing your taxable income. The expense is a debit, as we have seen previously, and the credit goes into what is called a "contra-asset" account on the balance sheet, called "Accumulated Depreciation". The combined total of the debit balance in the fixed asset account and the credit in the accumulated depreciation account combine to provide a net figure, demonstrating the net value of the assets you own. To complicate things, but to give you tax advantages, the IRS has multiple methods of calculating depreciation of various kinds of assets. These can be discussed at length with your bookkeeper, CPA or internal accountant.
One more thing...often a business owner or company will determine that many of the things that can be considered fixed assets will wear out well before a useful life is met. These items are often expensed immediately. Frequently, this company will determine a dollar value as a threshold to determine if an item will be considered a fixed asset or an expendable item. Depending on what you use in your business, you may want to do the same, setting the limint at $250, $500 or even $1,000.00. That way you won't have an excessive number of small value assets being depreciated over an extended life. This keeps your asset list - which should be relatively specific in its descriptions - smaller and saves substantial work when these small items have to be disposed of early.
Write back with questions. I'll look forward to hearing from you.
Gary
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