There are three foundational elements to accounting: Assets, Liabilities, and Equity. All are important to understanding your business’ financial health and are key parts to your company’s Balance Sheet. We will explore each in separate posts but for now we will dive into Assets.
What Are Assets?
Assets are resources and property owned by your business as a result of business transactions. If the business buys a company car, the car is an Asset. It is important to accurately record the value of each Asset in order to reflect the true financial state of your business. This is particularly important when meeting with potential investors or looking to obtain business loans and lines of credit.
Assets are recorded at cost. If you buy a car for $10,000, the Assets value is $10,000. They are typically not adjusted for market value. Certain Fixed Assets, such as equipment and computers, will be depreciated over time and will be reported as less than their cost.
Types of Assets.
There are two categories of Assets: Current Assets and Fixed Assets. Each category has multiple sub-categories.
Current Assets - These are Assets expected to be consumed, sold, or turned into cash within the current year.
Cash/Checking - money used to run day-to-day operations.
Accounts Receivable - money owed to your company for service or products already delivered (AKA unpaid customer invoices).
Inventory - the goods and materials that are in stock.
Prepaid Expense - Money paid for expenses not yet incurred. If you pay your insurance premium at the beginning of the year for the entire year, the portion for all months that have not passed is a Prepaid Expense Asset.
Fixed Assets - These are Assets purchased for long-term use and not likely to be converted into cash within the year.
Intangible Assets - these include things such as copyrights, patents, lease rights, etc.
Tangible Assets - these include things such as buildings, land, equipment, computers, furniture, etc.
Financial Assets - these are things like long-term investments.
Bookkeeping and Assets
It is important to keep accurate records for your business. Here are some helpful tips on how to keep your Assets accurate on your books.
Reconcile your checking and cash accounts monthly. In another post I will deep dive into reconciliation. Until then, note that it means matching internal documents with those of your financial institution. Reconciling will insure your Cash and Checking Assets are accurate.
Be sure to match customer payments to their outstanding invoices. If you add a entirely new transaction as opposed to matching a payment to an outstanding invoice, you duplicate transactions. This fails to decrease the amount in your Accounts Receivable Asset. You do not want to show more payments owed than are actually owed.
Set a reminder once a month to account for Prepaid Expense Assets. Go into your books and move the amount of the bill you prepaid for out of Prepaid Expenses and into the appropriate expense account. Here is a quick how-to for Quickbooks Online Users:
Click the “+New” button in the top left of the screen.
Click the “Journal Entry” option in the right column
Enter the date in the appropriate field (usually the end of the month)
In the “Account” Column of row 1, select the appropriate expense account.
In the “Debit” column of row 1, type the amount to be taken out of Prepaid Expenses.
In the “Description” column of row 1, type in notes telling you the reason for the entry.
In the “Account” Column of row 2, select the “Prepaid Expenses” account.
In the “Credit” column of row 2, type the amount to be removed.
In the “Description” column of row 2, type in notes telling you the reason for the entry.
Click “Save and Close.”
Do not forget to depreciate your Fixed Assets. Check with your CPA to see which Assets require depreciation and how many years to depreciate them over (useful life). Then set another reminder to go into your books once a month and reflect the depreciation. Here is a step-by-step guide to recording depreciation in Quickbooks Online:
Click the “+New” button in the top left of the screen.
Click the “Journal Entry” option in the right column
Enter the date in the appropriate field (usually the end of the month)
In the “Account” Column of row 1, select the “Depreciation Expense” account.
In the “Debit” column of row 1, type the amount to be depreciated.
In the “Description” column of row 1, type in notes telling you which asset is being depreciated.
In the “Account” Column of row 2, select the “Accumulated Depreciation” account.
In the “Credit” column of row 2, type the amount to be depreciated.
In the “Description” column of row 2, type in notes telling you which asset is being depreciated.
Hit “Save and close.”
Also, here is an Easy Calculator to help you figure out how much needs to be depreciated monthly based on the Assets recorded value and useful life in years.
The Wrap-up
So now you know more about Assets as well as the different types you may see as a business owner. Simply put, they are the things your business owns. Accurate reporting of their value is important when it comes to understanding your business’ financial health, meeting with investors, or trying to obtain a loan or lines of credit. Be sure to be diligent and up-to-date on recording them to your business books.
Keep in mind, a bookkeeping professional is well versed in accounting for Assets. So if you want to save some time and have a little peace of mind, feel free to schedule a free consultation to see how I can help with your bookkeeping needs.