In order to track money within an organization, different types of accounting categories exist. These categories are used to denote if the money is owned or owed by the organization. Let us discuss the three main categories: Assets, Liabilities, and Capital.
An Asset is a property of value owned by a business. Physical objects and intangible rights such as money, accounts receivable, merchandise, machinery, buildings, and inventories for sale are common examples of business assets as they have economic value for the owner. Accounts receivable is an unwritten promise by a client to pay later for goods sold or services rendered.
Assets are generally listed on a balance sheet according to the ease with which they can be converted to cash. They are generally divided into three main groups:
A Current Asset is an asset that is either:
• Cash – includes funds in checking and savings accounts
• Marketable securities such as stocks, bonds, and similar investments
• Accounts Receivables, which are amounts due from customers
• Notes Receivables, which are promissory notes by customers to pay a definite sum plus interest on a certain date at a certain place.
• Inventories such as raw materials or merchandise on hand
• Prepaid expenses – supplies on hand and services paid for but not yet used (e.g. prepaid insurance)
In other words, cash and other items that can be turned back into cash within a year are considered a current asset.
Fixed Assets refer to tangible assets that are used in the business. Commonly, fixed assets are long-lived resources that are used in the production of finished goods. Examples are buildings, land, equipment, furniture, and fixtures. These assets are often included under the title property, plant, and equipment that are used in running a business. There are four qualities usually required for an item to be classified as a fixed asset. The item must be:
• Used in the business
• Not be available for sale
Certain long-lived assets such as machinery, cars, or equipment slowly wear out or become obsolete. The cost of such as assets is systematically spread over its estimated useful life. This process is called depreciation if the asset involved is a tangible object such as a building or amortization if the asset involved is an intangible asset such as a patent. Of the different kinds of fixed assets, only land does not depreciate.