Assets

What it means

Assets are everything the company owns or controls and expects a benefit from: money in the bank, inventory on the shelf, unpaid customer invoices, machinery, a car, software. On the balance sheet they form the left-hand side, and their total matches the total of liabilities and equity to the cent.

They are split by how quickly they turn into cash. Fixed assets serve the company for more than a year and reach the profit and loss account gradually through depreciation. Current assets - inventory, receivables, cash - turn over several times a year.

Not everything valuable is an asset in the accounting sense. A good name, an experienced team or a client base built in-house never appear on the balance sheet, because they cannot be measured reliably. Goodwill enters it only when a business is bought or merged and someone pays more than the net value of its individual assets.

How it works in practice

Growing assets are not good news by themselves. What matters is how they are funded: if they grow alongside equity, the company is earning; if they grow alongside loans and payables, it is only borrowing. That is why both sides of the balance sheet are read together.

At each monthly close we check that asset balances rest on documents: the bank balance on the bank statement, receivables on the sub-ledger, inventory on a stocktake. Without that link the balance sheet is just a set of numbers.

With every larger purchase we decide whether it creates an asset or a cost. A laptop or a tool priced below the fixed-asset threshold can go straight to expenses as low-value assets, even though it serves the company for years. The company sets that threshold, within the law, in an internal policy and then has to apply it the same way to every purchase, not according to which profit figure suits it this year.

What to watch out for

The usual problem is overstated assets - ageing receivables nobody will collect and stock nobody will buy, still carried at full value. The company looks wealthier than it is, and both profit and the tax base are distorted. The answer is an impairment allowance, not silence.

A second common problem is a cash box that exists only on paper. The balance sheet shows a large cash balance, while the money left long ago with a shareholder or the director without a receipt. Banks and a tax audit spot it among the first things. The gap has to be established and booked as what it really is, for example a receivable from the shareholder, before someone else starts asking about it.