Deep Dive Into The Balance Sheet with Assets (What You OWN) in This #FinancialLiteracy Series

Expanding on our financial literacy series – and defining terms on our top three business financial reports – we start with the Balance Sheet. It has three main components, one of which we’ll address here: Assets.

The Balance Sheet (or for Non-Profit Organizations, The Statement of Financial Position)

The Balance Sheet is a snapshot of:

1. What a company owns (Assets),
2. What it owes (Liabilities),
3. and what is left for the investors (Owner’s Equity or Retained Earnings).  

(As a non-profit organization cannot have owner’s or equity, per se, this is called Net Assets.)

The Balance Sheet is a perpetual statement – meaning it begins upon formation of the organization and has no ‘end’ until the organization ends.  Dates shown at the top of this form are as of that point in time.

The formula to ensure the statement ‘balances’ is Assets = Liabilities + Owner’s Equity.

Note:  All of this assumes we are using the Accrual Method of accounting (click HERE for a brief video explanation of cash vs accrual accounting methods explained for CEOs and Executive Directors).

Assets

Assets are what the company owns, and they are listed on the balance sheet in order of ‘liquidity’ – how quickly things can be converted to cash.  

Current Assets are assets that can be expected to convert to cash within one year.

Capital Assets – Also known as Fixed Assets  – are items that have an economic life greater than 1 year – for example a vehicle, a computer, a building, office equipment, manufacturing equipment, office furniture, etc. and are thus Capitalized and the total purchase price is recorded on the Balance Sheet.

Accumulated Depreciation – A reduction of the value of the fixed assets.  For example, if you purchased a $9,000 piece of equipment, and it is expected to last 9 years, then you would lose 1 year of value of the asset every year – and in financial terms you would ‘use’ $1,000 value every year.  In our example here, $4,000 Accumulated Depreciation means that the asset has been used for 4 years, and has a value today of $5,000.  

Net Book Value  is the value of your fixed assets today.  It may or may not correlate to what the market value is (what you could get for it if you tried to sell it today), so it is an approximation.

Total Assets = the total dollar value of what your company owns as of the date of the report – all the cash in your bank account, all the money folks owe you, what you’ve paid for ahead of time, and the value of your capital assets.  

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