What it means
When people talk about assets in the plural, they usually mean the whole collection shown on the balance sheet. The total tells you what resources the business has at a point in time, while the breakdown tells you what kind of resources they are.
A company with mostly cash is in a very different position from one with mostly specialised machinery. The standard grouping is current and non-current.
Current assets are expected to be used or turned into cash within a year, and include cash, accounts receivable, inventory and prepayments. Non-current assets last longer and include property, plant and equipment, long-term investments and intangible assets such as patents.
Assets are listed in a set order, generally from the most liquid (the quickest to convert into cash) to the least. Cash comes first, followed by receivables and stock, then long-term items.
This order helps readers judge whether a company can meet short-term bills. Assets are paid for by borrowing or by the owners' funds, so they are always balanced by liabilities and equity.
The difference between total assets and total liabilities is net assets, which equals equity. Growth in assets is only healthy if it is matched by growth in profit and cash, because assets financed by debt also bring interest costs.
Different measurement bases can apply. Most assets sit at cost less depreciation, but financial instruments and some property may be shown at fair value.
Reading the notes to the accounts explains which basis was used and why it matters. Liquidity is the thread that connects a company's assets to its survival.
A profitable business can still fail if its assets are tied up in stock or in unpaid invoices when the bills fall due. For that reason, finance teams watch not only how many assets there are, but how quickly they can be turned into cash.
In practice
Real-world examples
Example 1
A construction company reviews its balance sheet before bidding for a large contract. It sees $3,000,000 of cash and receivables against $2,000,000 of short-term bills, which gives the board comfort that it can fund the early costs of the project.
Example 2
A potential buyer of a small e-commerce firm finds that 70% of the target's assets are inventory. She asks for a physical stock count and a review of slow-moving lines before agreeing on a price.
Example 3
A bank assessing a loan application asks for a schedule of the borrower's assets, split into those that could easily be sold and those that could not. It uses the list to decide how much security to take. The bank reviews the schedule again every year before renewing the facility.
Think of it
Think of assets like the tools in a toolbox. Just as tools help a handyman fix things and build new projects, assets help a business operate and grow.
Formula
Calculation
Total assets = Current assets + Non-current assets
Net assets = Total assets - Total liabilities
Suppose a print business has cash of $50,000, receivables of $150,000 and inventory of $150,000. Current assets = 50,000 + 150,000 + 150,000 = $350,000. It also owns equipment of $500,000 and a software licence of $150,000, so non-current assets = 500,000 + 150,000 = $650,000.
Total assets = 350,000 + 650,000 = $1,000,000. If total liabilities are $600,000, net assets = 1,000,000 - 600,000 = $400,000.Case study
Seen in the real world
Willowbrook Pharmacies is an illustrative, fictional chain with total assets of $5,000,000 at the start of the year. Of this, $2,500,000 was inventory, $1,000,000 receivables from insurers, $500,000 cash and $1,000,000 fixtures and fittings.
The chief financial officer noticed that inventory was half of all assets and that some medicines were nearing their expiry dates. She introduced weekly stock reviews and negotiated smaller, more frequent deliveries with suppliers.
Inventory fell to $1,800,000 within nine months and the released cash was used to pay down a bank loan. The illustrative lesson is that the make-up of assets matters as much as their total. She also asked the team to report the proportion of assets that could be turned into cash within 30 days, and the board adopted it as a standing measure.
Watch out
Common mistakes
- Assuming bigger total assets always means a stronger company, when the assets may be funded by heavy borrowing or be of poor quality.
- Treating balance sheet values as what the assets could be sold for, when book value can differ widely from market value.
- Counting costs that were expensed as if they were assets, when only items meeting the recognition rules appear on the balance sheet.
Questions
People also ask
What counts as a current asset?
Cash and items expected to be turned into cash, sold or used within one year or the normal operating cycle, such as receivables and inventory.
What is the difference between assets and net assets?
Assets are everything the business owns, while net assets are assets minus liabilities, and equal the owners' stake.
Are intangible assets really assets?
Yes, if they are identifiable, controlled by the business and expected to bring benefits, as with patents, licences and purchased software.
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