Types of assets in accounting, with examples
An asset is anything the business owns, or is owed, that will bring money in later. The kinds, where each one sits on the balance sheet, and the three mistakes that put them in the wrong place.
An asset is something the business owns or controls, that can be measured in money, and that will bring a benefit later — by being sold, by being used, or by being collected. A loom is an asset because it will weave cloth for years. A customer who owes you ₹2,00,000 is an asset because the money is coming. Rent you paid last month is not: that benefit is already used up, so it is an expense.
Fixed assets (non-current assets)
Things bought to be USED in the business, not to be sold, and that last more than a year. Their cost is not charged to profit in the year of purchase. It is spread over the years the asset works, and that yearly share is depreciation.
- Land and building — the shop, the godown, the factory shed.
- Plant and machinery — looms, folding machines, a generator.
- Furniture and fittings — racks, counters, air conditioners.
- Computers and printers.
- Vehicles — a delivery tempo, the office car.
Current assets
What will turn into cash, or be used up, within about a year in the ordinary run of business. For a trader this is where most of the money sits.
- Stock (inventory) — grey cloth, finished cloth, yarn, goods lying with a mill or a job worker.
- Sundry debtors — customers who bought on credit and have not paid yet.
- Cash in hand and balances in bank accounts.
- Advances to suppliers — money paid before the goods arrived.
- Deposits — the electricity deposit, a rent deposit, a tender deposit.
- GST input credit — tax you paid on purchases that will be set off against tax on sales.
- TDS receivable — tax a customer deducted from your bill, which you claim in your return.
Investments
Money put somewhere outside the business to earn a return: fixed deposits, shares, mutual funds. A fixed deposit kept as margin for a bank limit belongs here too.
Intangible assets
Assets with no body: goodwill paid when buying a running business, a registered trademark, a software licence bought outright. They are valued at what was paid for them, never at what the owner feels the name is worth.
One business, sorted
| What the business has | Kind of asset | Why |
|---|---|---|
| Folding machine bought for ₹3,50,000 | Fixed | Used for years, not for sale |
| 4,000 meters of grey cloth in the godown | Current (stock) | Bought to be sold |
| 6,000 meters lying with the dyeing mill | Current (stock) | Still yours until it is sold |
| Shree Fabrics owes ₹2,00,000 | Current (debtor) | To be collected |
| ₹50,000 paid in advance to a yarn supplier | Current (advance) | Goods are still to come |
| Fixed deposit of ₹5,00,000 | Investment | Earns interest outside the trade |
Three mistakes that put an asset in the wrong place
- Charging a machine to expenses. A ₹3,50,000 machine written off as "repairs" makes this year look poor and every later year look better than it was. If it will work for more than a year, it is a fixed asset.
- Leaving out stock that is not in the godown. Cloth at the mill has left the building and not the business. Left out, the balance sheet is short by exactly that cloth.
- Hiding a debit balance inside creditors. If you have overpaid a supplier, that supplier owes YOU. Shown as a negative creditor it shrinks both sides of the balance sheet; it is an asset and belongs on the assets side.
The equation behind it Assets = Liabilities + Capital. Everything the business has was paid for either with somebody else's money (a liability) or with the owner's (capital). If the two sides of a balance sheet differ, something has been left out — it is never "about right".