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Accountancy Study Notes ASSETS

A STUDY NOTES

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33 views2 pages

Accountancy Study Notes ASSETS

A STUDY NOTES

Uploaded by

fe.leyros
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Accountancy Study Notes: Assets

1. What are Assets?

 Assets are resources owned or controlled by a business that are expected to provide future
economic benefits.
 They are critical for the business’s operations and can be used to generate revenue,
provide products or services, and meet financial obligations.

2. Types of Assets

Assets are categorized based on their characteristics and usage:

 Current Assets:
o Assets expected to be converted into cash, sold, or used up within one year or
within the business’s operating cycle.
o Examples: Cash, Accounts Receivable, Inventory, Short-Term Investments,
Prepaid Expenses.
 Non-Current (Fixed) Assets:
o Long-term assets that are expected to provide benefits for more than one year.
o Examples: Property, Plant, and Equipment (PP&E), Long-Term Investments,
Intangible Assets (e.g., patents, copyrights).
 Intangible Assets:
o Non-physical assets with value due to intellectual property rights or long-term
advantages.
o Examples: Patents, Trademarks, Goodwill.

3. How Assets are reported in the Balance Sheet

 Assets are reported on the left side (or top) of the balance sheet.
 Listed in order of liquidity (how quickly they can be converted into cash):
o Most Liquid Assets: Cash and cash equivalents are listed first.
o Least Liquid Assets: Fixed assets like land, buildings, and equipment appear
after current assets.

4. Valuing Assets

 Historical Cost: Most assets are recorded at their original purchase price.
 Fair Market Value: Certain assets, like marketable securities, are listed at current
market value.
 Depreciation and Amortization: Fixed assets and intangible assets (except land) are
depreciated or amortized over their useful lives.

5. Key Asset-Related Concepts


 Liquidity: A measure of how quickly an asset can be converted into cash without
significant loss in value.
 Depreciation: A method of allocating the cost of tangible fixed assets over their useful
lives. Common methods include:
o Straight-Line Depreciation: Equal expense amount over the asset’s useful life.
o Declining Balance: Higher expense in earlier years, decreasing over time.
 Amortization: Similar to depreciation but applies to intangible assets.

6. Journal Entries for Asset Transactions

 Purchasing an Asset:
o When buying an asset, debit the asset account and credit cash or accounts
payable.
o Example: Buying equipment for $10,000 on credit. \text{Debit: Equipment
(Asset) $10,000} \quad \text{Credit: Accounts Payable $10,000}
 Depreciating an Asset:
o Record depreciation by debiting a depreciation expense account and crediting
accumulated depreciation.
o Example: Depreciating $500 on equipment. \text{Debit: Depreciation Expense
$500} \quad \text{Credit: Accumulated Depreciation $500}

7. Important Asset Ratios

 Current Ratio: Measures liquidity by comparing current assets to current liabilities.

Current Ratio = Current Liabilities / Current Assets

 Return on Assets (ROA): Measures how efficiently assets are used to generate profit.

ROA=Total Assets / Net Income

8. Asset Management Tips

 Regularly review asset performance and usefulness.


 Maintain accurate records for depreciation and amortization.
 Use the right depreciation method based on asset type and business requirements.
 Track current assets closely to maintain optimal liquidity.

Understanding assets and how to manage them effectively is essential for maintaining a
business’s financial health and operational efficiency. Practicing entries, understanding valuation
methods, and using asset ratios will strengthen your foundation in asset management within
accountancy.

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