Updated July 11, 2023
Definition of Total Assets
Total assets (T.A) can be defined as sum total of the money value of all monetary and non-monetary economic resources owned, managed, and controlled by an organization which is either having current economic value or is capable of generating future economic benefits for the organization either within a short period of time or in the long run.
Explanation
Assets, in simple terms, are defined as anything and everything a business owns that have value, can be converted to cash, and is categorized as current or non-current assets. Total asset is the sum of all current and non-current assets equal to the sum of total liabilities and stockholder’s equity on the other side of the balance sheet. T.A. disclose in the balance sheet as per the applicable GAAP laws of the land. For example, these may be listed on a balance sheet in the order of their liquidity. The valuation of each asset is recorded as the asset’s purchase value. When all the assets are classified and listed in the appropriate order on the balance sheet, the sum of their valuation is combined to derive the T.A. value.
The Formula of Total Asset
Depending on the availability of information, T.A can be derived as follows: –
Or
Or
Where
- Current Assets: Current assets are Those assets that can be converted into cash or cash and cash equivalents within one year of acquisition. Examples: cash, cash, cash equivalent, accounts receivable, marketable securities, inventories, and prepaid expenses.
- Non-Current Assets: Non-current assets generate economic benefits from a period greater than one year from the acquisition or the balance sheet date. Examples: fixed assets, plant, and machinery, furniture, land and building, intangible assets, goodwill, etc.
How to Calculate Total Assets?
To calculate T.A following steps must be followed –
- Identify Your Assets: The first step to calculating T.A. is the identification of all assets. One must know whether the item will generate any economic benefits to the organization; if yes, then list such items. Identification and valuation of intangible assets may be a problem. Intangible assets will also form part of T.A.
- List Your Asset: The foremost step to be taken is to list the values of any current asset like cash, inventory, money owed to you, and fixed assets like buildings and machines. Also, the value of long term investments such as stocks and bonds should be considered.
- Valuation: Next step is to identify the value of the asset. This may be either the asset’s cost or the present value of sum total of future economic benefits that any asset will generate. Depending upon the use, certain other valuations like net realizable value, historical cost, net replacement value, or future economic value may be applied for valuation.
- Add up Your Assets: Add all the assets to find the final amount.
- Check the Basic Accounting Formula: One can cross verify the sum total of assets with the help of the accounting equation, which says T.A. will always be equal to sum total of total liabilities + owner’s equity. Where equity is the owner’s fund of a company, such as capital or shareholders fund, and liability is the company’s debts that need to be paid off, such as loans, operation expenses, salaries, etc.
Examples of Total Assets
Following are the examples given below:
Example #1
From the following details, ascertain the T.A value: –
|
Particulars |
Amount($) |
| Land | 50,00,000 |
| Machinery | 80,00,000 |
| Accumulated Depreciation on Machine | 30,00,000 |
| Inventory | 60,00,000 |
| Furniture | 40,00,000 |
| Accumulated Depreciation on Furniture | 10,00,000 |
| Cash | 10,00,000 |
| Bank | 40,00,000 |
Solution:
T.A is calculated as
- Total Assets = 50,00,000 + (80,00,000 – 30,00,000) + 60,00,000 + (40,00,000 – 10,00,000) + 10,00,000 + 40,00,000
- Total Assets = 50,00,000 + 50,00,000 + 60,00,000 + 30,00,000 + 10,00,000 + 40,00,000
- Total Assets =$2,40,00,000
Hence Total Assets of Amazon Inc. are $2,40,00,000.
Example #2
Identify and determine the T.A value from the following items
| Particulars | Amount ($) |
| Land | 1,00,000 |
| Machinery | 2,00,000 |
| Cash | 50,000 |
| Warranty claim provision | 20,000 |
| Debentures issued | 20,000 |
Solution:
Identification
|
Particulars |
Asset -Yes/No |
Remarks |
| Land | Yes | – |
| Machinery | Yes | – |
| Cash | Yes | – |
| Warranty claim provision | No | It’s a contingent liability that may be paid in future |
| Debentures issued | No | It’s a long-term liability disclosed on the liability side |
Total Assets is calculated as
Therefore, Total Assets = Land + Machinery + Cash
- Total Assets = 2,00,000+1,00,000+50,000
- Total Assets = 3,50,000
Balance Sheet
The balance sheet is used to disclose the T.A. of a company and how these assets are financed, whether through debt or equity. It is a statement of a company’s net worth and financial position. To record an asset on the balance sheet, it must be classified as a current or long-term asset. According to the applicability of accounting standards, the assets may or may not be recorded at their current market value or cost. According to IFRS, the assets are stated at their current market values. The acquirer of the asset will judge the asset value on the balance sheet, which usually corresponds to the actual value of an asset or is there any difference in value?
Sample Balance Sheet (Asset side)
|
Particulars |
Current FY Fig($) |
Previous FY Fig($) |
| Non-Current Assets- | ||
| Fixed Assets- | ||
| Land, Buildings, furniture, etc. | ||
| Non-Current Investments | ||
| Deferred Tax Assets | ||
| Long-Term Loans & Advances | ||
| Current Assets | ||
| Inventories, Accounts Receivable, etc |
Total Assets vs Current Assets
T.A. is the sum total of all the current and non-current assets and forms the asset side of the balance sheet. In contrast, current assets are the assets that are part of total assets and capable of converting, utilizing, and realizing into cash or cash equivalent within one year of acquisition or balance sheet date. Current assets are the most liquid assets and are easily realizable at any point in time and include cash and cash equivalent, inventory, accounts receivable, etc. At the same time, T.A. includes all current and other non-current assets like land and building, plant and machinery, equipment, vehicles, goodwill, etc.
Advantages
Some of the advantages are given below:
- Total assets produce positive economic value for a financial entity, whether tangible or intangible.
- Total assets represent the company’s own value and can be converted into cash whenever required.
- It shows the capacity of a profit-oriented enterprise that helps contribute directly or indirectly to future net cash flows and in providing services.
- One can measure profit generation performance by comparing it with benchmark accounting ratios like total asset margin ratio, net profit to T.A. ratio, Total assets turnover ratio, etc.
Limitations
Some of the limitations are given below:
- Identification and valuation of intangible assets is a challenge and might affect T. A valuation if these are not evaluated properly.
- The balance sheet discloses assets at a historical cost which does not reveal the actual realizable value in certain cases.
- Assets like employees who do not possess monetary value cannot form part of the total asset but play a great role in running a business.
Conclusion
Asset plays a crucial role in studying the financial world. An entity should try to utilize its assets in the best possible manner. A firm’s health is decided based on various parameters in which T.A. play a crucial part. It helps predict the profit a firm generates, determine its efficiency level, and make action plans accordingly for meeting our targets.
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