On the Balance Sheet – What is an Asset?Posted by Celeste
If your small business is looking for lending or investment, as part of your business plan, you will need to prepare your pro forma financial statements. The balance sheet is one of these, and the first part of the balance sheet will list all of your company’s assets. But what does that mean exactly? What counts as an asset and what does a balance sheet tell you about them?
First of all, the balance sheet shows what is owned and owed by a company at a particular moment in time. This is entirely unlike the other pro forma statements (Income Statement, Statement of Cash Flows) that show activity over a period of time.
Current Assets are the very liquid kind, that is, they are either cash, or can become cash very easily. Inventory is an easy to comprehend example of a current asset. If you sell your inventory, you will get cash for it. There are other Current Assets, such as accounts receivable that are not as intuitive, though. Accounts receivable means that you have delivered a good or performed a service, and billed for it, with the expectation that the amounts in these accounts will be received in the near future in the form of cash. Sometimes expenses can be assets, but only if you pre-pay them. The classic example of a pre-paid expense is an insurance policy. Rather than pay it monthly, the insurance policy is paid in full for a longer period of time (often a year) and the portion of it that has not expired is considered a current asset.
These are the physical things that your company uses to make its money with. This category is also called property, plant, and equipment. This is the part of the balance sheet that will list any real estate owned by the company, and all of your equipment, even your computers and vehicles. The purchase price is listed for this equipment, and the depreciation (or amount that has been used up) is also shown.
These are assets that you can’t really touch, but that exist and are worth money nonetheless. These assets are directly responsible for your company earning money. Good examples of this asset class are patents or other intellectual properties. Some websites can also be counted as intangible assets.
Goodwill is an accounting term that is used to describe the amount over and above the book value of a company that was paid for that company when it was purchased. This is a tricky thing and it does not always reflect value in the company. There are times when one company buys another for a very high price, and then ends up having to admit it overpaid. This is done by “writing down” or devaluing goodwill on the balance sheet.
What kinds of assets does your company have? How have you recorded them on your balance sheet?