WHAT ARE ASSETS?

This is the component that details all that the company owns. Assets, then, are any items of economic value owned by a corporation that can be converted into cash. There are two main kinds of assets – current and long-term assets.

CURRENT ASSETS:

Are assets that can be easily converted to cash in the short term within one year. Bondholders and other creditors closely monitor a firm's current assets since interest payments are generally made from current assets. It is also important because assets can be easily liquidated into cash, which could help prevent loss of your investments incase of bankruptcy.

Also, current assets are important to most companies, as they are a source of funds for day-to-day operations. It is, thus, evident that the more current assets a company owns, the better it is performing.

Cash and cash equivalents are also a kind of current assets. Cash equivalents are non-cash items, but which can be converted into cash quite easily. For this reason, they are considered equal to cash. Cash equivalents are generally highly liquid, can be sold easily, short-term and safe investments like bank deposits.

Accounts Receivable is another kind of a current asset. It is the money customers – either individuals or corporations – owe the firm in exchange for goods or services that have been delivered or used. For example, suppose your shopkeeper is willing to supply goods on an account-basis, and you pay for all the goods at the end of the month, whatever money you owe him will be counted as accounts receivable until you actually pay for it.

Simply put, this is business being done on credit instead of cash. For this reason, it is a significant component of the balance sheet. Although accounts receivable is money owed to you, it is recorded as an asset on the balance sheet as it represents a legal obligation for the customer to pay the cash.

 A firm’s inventory is the stock of goods produced that have not been sold yet. It sometimes also includes the materials already bought for manufacturing a particular good.

For this reason, a manufacturing company will often have three different types of inventory: raw materials, works-in-process, and finished goods. A retail firm's inventory, generally, will consist only of products purchased that are still to be sold. Since inventory is likely to earn the company money in the future, it is recorded as an asset on the balance sheet.

LONG-TERM ASSETS :

Are those assets that cannot be converted into cash in the current or upcoming fiscal year.

They are grouped into several categories like:

 A long-term tangible asset is one that is held for business use and is not expected to be converted to cash in the current or upcoming fiscal year. Examples include manufacturing equipment, real estate, and furniture. Fixed assets like equipment, buildings, production plants and property are a kind of long-term tangible asset. They are very important to a company because they represent long-term investments that will not be liquidated soon and can facilitate the company’s earnings.

On the balance sheet, these are valued at their cost. As the value of the asset declines over the years, depreciation is subtracted from all such assets, except land. Depreciation gives you an estimate of the decrease in the value of an asset that is caused by 'wear and tear'. Sometimes, it also occurs because the asset has become obsolete. Depreciation appears in the balance sheet as a deduction from the original value of the fixed assets. This is because the value of the fixed asset decreases due to ‘wear and tear’.

Intangible assets are non-physical assets such as copyrights, franchises and patents. Since they are intangible and not concrete like tangible assets, it becomes difficult to estimate their value. Often there is no ready market for them. However, there are times when an intangible asset can be the most valuable asset that a company possesses.