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Assets

Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow
to the entity (IASB Framework). In simple words, asset is something which a business owns or controls to benefit from its use in some
way. It may be something which directly generates revenue for the entity (e.g. a machine, inventory) or it may be something which
supports the primary operations of the organization (e.g. office building).

Classification

Assets may be classified into Current and Non-Current. The distinction is made on the basis of time period in which the economic
benefits from the asset will flow to the entity.

 Current Assets are ones that an entity expects to use within one-year time from the reporting date.
 Non Current Assets are those whose benefits are expected to last more than one year from the reporting date.

Classification: Physical attributes

On the basis of their physical attributes, assets can be of two types:

 Tangible Assets  Intangible Assets


Tangible Assets

Tangible Assets are those assets that can identified and also have physical existence or substance. For example, computer system,
office table, building, machinery, stocks are all examples of tangible assets as these can be touched and seen.

Intangible Assets

Intangible Assets on the other hand are those non-monetary assets (other than cash and cash equivalents) which can be
distinguished separately from other assets of the entity but do not have any physical existence or substance. For example, goodwill,
copyrights, patents, software etc are intangible assets.

Classification: Term of use

Assets whether tangible or intangible are classified in two categories based on how long they will be providing benefits to the entity
and they can be classified as:

 Non-Current Assets  Current Assets


Non-Current Assets

These are the assets (tangible or intangible), which provide future economic benefit for more than one year/financial period. As
these assets have useful lives of more than one year so their economic benefit is obtained in two or more financial years.

Examples of these assets are;

 Land  Machinery
 Building  Computers
Current Assets

These are the assets (tangible or intangible), which provide future economic benefit for the period of one year or less. Usually these
assets are consumed within one year or there benefit is short term.

Examples of these assets are:

 Stock in trade  Cash in Hand


 Stationery  Cash at Bank
Asset

In financial accounting, an asset is an economic resource. Anything tangible or intangible that can be owned or controlled to produce
value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that
can be converted into cash (although cash itself is also considered an asset). The balance sheet of a firm records the
monetary[2] value of the assets owned by the firm. It is money and other valuables belonging to an individual or business.[1] Two
major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and
fixed assets.[3] Current assets include inventory, while fixed assets include such items as buildings and equipment.[4]Intangible assets
are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market
place. Examples of intangible assets are goodwill, copyrights, trademarks, patents andcomputer programs,[4] and financial assets,
including such items as accounts receivable, bonds and stocks.

Formal definition

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to
flow to the entity[5] (Framework Par 49a).

Current assets[edit]

Current assets are cash and other assets expected to be converted to cash or consumed either in a year or in the operating cycle
(whichever is longer), without disturbing the normal operations of a business. These assets are continually turned over in the course
of a business during normal business activity. There are 5 major items included into current assets:

1. Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit accounts, andnegotiable
instruments (e.g., money orders, cheque, bank drafts).
2. Short-term investments — include securities bought and held for sale in the near future to generate income on short-term
price differences (trading securities).
3. Receivables — usually reported as net of allowance for non-collectable accounts.
4. Inventory — trading these assets is a normal business of a company. The inventory value reported on the balance sheet is
usually the historical cost or fair market value, whichever is lower. This is known as the "lower of cost or market" rule.
5. Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (common
examples are insurance or office supplies). See also adjusting entries.
6. Marketable securities: Securities that can be converted into cash quickly at a reasonable price.

The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of
current liabilities.

Long-term investments[edit]

Often referred to simply as "investments". Long-term investments are to be held for many years and are not intended to be disposed
of in the near future. This group usually consists of three types of investments:

 Investments in securities such as bonds, common stock, or long-term notes.


 Investments in fixed assets not used in operations (e.g., land held for sale).
 Investments in special funds (e.g. sinking funds or pension funds).
 Different forms of insurance may also be treated as long term investments.

Fixed assets

Also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use in earningprofit in a
business. This group includes as an asset land, buildings, machinery, furniture, tools, IT equipment, e.g., laptops, and certain wasting
resources e.g., timberland and minerals. They are written off against profits over their anticipated life by
charging depreciation expenses (with exception of land assets). Accumulated depreciation is shown in the face of the balance sheet
or in the notes. An asset is an important factor in a balance sheet. These are also called capital assets in management accounting.
Intangible assets

Intangible assets lack of physical substance and usually are very hard to evaluate. They
include patents, copyrights,franchises, goodwill, trademarks, trade names, etc. These assets are (according to US GAAP) amortized to
expense over 5 to 40 years with the exception of goodwill. Websites are treated differently in different countries and may fall under
either tangible or intangible assets.

Tangible assets

Tangible assets are those that have a physical substance, such as currencies, buildings, real estate, vehicles, inventories,
equipment, art collections, and precious metals. Depreciation is applied to tangible assets when those assets have an anticipated
lifespan of more than one year. This process of depreciation is used instead of allocating the entire expense to one year.[9] Tangible
assets such as art, furniture, stamps, gold, wine, toys and books have become recognized as an asset class in their own right[10] and
many high-net-worth individuals will seek to include these tangible assets as part of their overall asset portfolio. This has created a
need for tangible asset managers.

Liabilities

According to IASB Framework liability is defined as follows: A liability is a present obligation of the enterprise arising from past
events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits
(IASB Framework). In simple words, liability is an obligation of the entity to transfer cash or other resources to another party.
Liability could for instance be a bank loan, which obligates the entity to pay loan installments over the duration of the loan to the
bank along with the associated interest cost. Alternatively, an entity's liability could be a trade payable arising from the purchase of
goods from a supplier on credit.

Classification

Liabilities may be classified into Current and Non-Current. The distinction is made on the basis of time period within which the
liability is expected to be settled by the entity.

 Current Liability is one which the entity expects to pay off within one year from the reporting date.
 Non-Current Liability is one which the entity expects to settle after one year from the reporting date.

Classification of Assets and Liabilities

Proper classification of assets and liabilities is necessary as otherwise the Balance Sheet may fail to provide meaningful information.
The various items of assets and liabilities in the Balance Sheet should be properly grouped.

Classification of Assets

1. Fixed Assets: These assets are of a permanent nature. These are acquired for the purpose of generating revenue and are not
meant for resale. Examples of fixed assets are : land, buildings, plant and machinery, motor vehicles, furniture and fixtures, patents,
goodwill, etc. As the purpose of these assets is use, changes in their market value are ignored. These assets are shown in the Balance
Sheet at cost less depreciation, giving details about both the figures. Total of fixed assets is called gross block, Gross block minus
depreciation is known as net block. The fixed assets which have a limited useful life and which depreciate rapidly are called wasting
assets, e.g., mines, quarries, etc. Goodwill and patents which cannot be seen are known as intangible assets. Assets like plant and
machinery, stock, cash, etc., can be seen and felt, and are therefore called tangible assets.
2. Investments: These include the money invested in various kinds of securities. Investments may be of two types — long term
investments and short term investments. Long term investments are treated as fixed assets whereas short term investments are
treated as current assets.
3. Current Assets: These assets are acquired and held for consumption or resale in the ordinary course of business. These are
converted into cash within a short period of time. Current assets include cash and bank balances, sundry debtors, short term loans,
closing stock, prepaid expenses, interest receivable on investments and other accrued income, advances against supply of raw
materials. These assets are also known as circulating assets.
4. Fictitious Assets: These assets are not represented by possession of any property and, therefore, have no market value.
Preliminary expenses, discount on issue of shares and debentures, etc are examples of fictitious assets. These are to be written off
against Profit and Loss Account.

Classification of Liabilities

1. Fixed Liabilities: These liabilities are repayable after a long period of time. These are not repayable within a short period or during
the operating cycle of business. Long term loans, loans or mortgage, and debentures are examples of fixed liabilities.
2. Current Liabilities: These liabilities are repayable within a year or in the near future. These include trade creditors, bills payable,
outstanding expenses, bank overdraft, etc.
3. Contingent Liabilities: These are anticipated liabilities. These are uncertain and may or may not arise in future on the happening of
a certain event. If the contemplated event occurs, a contingent liability becomes a real liability. Liability on bills discounted, disputed
claims or liability under a damage suit, guarantee for a loan is examples of contingent liabilities.

equity

1. Ownership interest in a corporation in the form of common stock or preferred stock.


2. Total assets minus total liabilities; here also called shareholder's equity or net worth or book value.
3. Real Estate: The difference between what a property is worth and what the owner owes against that property (i.e. the difference
between the house value and the remaining mortgage or loan payments on a house).
4. In the context of a futures trading account, it is the value of the securities in the account, assuming that the account is liquidated
at the going price. In the context of a brokerage account, it is the net value of the account, i.e. the value of securities in the
account less any margin requirements.

What is a drawing account?

The drawing account is an accounting record used in a business organized as a sole proprietorship or a partnership, in which is
recorded all distributions made to the owners of the business. They are, in effect, "drawing" funds from the business (hence the
name). There is no tax impact associated with the withdrawn funds from the perspective of the business, since taxes on these
withdrawals are paid by the individual partners.

The accounting transaction typically found in a drawing account is a credit to the cash account and a debit to the drawing account.
The drawing account is an equity account; this means that the drawing account is a contra equity account, and is therefore reported
as a reduction from total equity in the business. Thus, a drawing account deduction reduces the asset side of the balance sheet and
reduces the equity side at the same time.

The drawing account is not an expense - rather, it represents a reduction of owners' equity in the business. The drawing account is
intended to track distributions to owners in a single year, after which it is closed out (with a credit) and the balance is transferred to
the owners' equity account (with a debit). The drawing account is then used again in the next year to track distributions in the
following year. This means that the drawing account is a temporary account, rather than a permanent account.

It is useful to create a schedule from the drawing account, showing the detail for and summary of distributions made to each partner
in the business, so that the appropriate final distributions can be made at the end of the year to ensure that each partner receives his
or her correct share of the earnings of the business, in accordance with the terms contained within the partnership agreement. This
is particularly important if there is a risk of disputes over the amount of funds distributed amongst the partners.

In businesses organized as companies, the drawing account is not used, since owners are instead compensated either through wages
paid or dividends issued. In a corporate environment, it is also possible to compensate owners by buying back their shares in
a treasury stock transaction; however, this also reduces their relative ownership percentage of the business, if they are the only
shareholders whose shares are being repurchased. If the shares of all shareholders are being repurchased in equal proportions, then
there is no effect on relative ownership positions.