How to Calculate Assets
Assets have monetary value, and being able to calculate the assets your business has is a must when you apply for a business loan or speak with potential investors. Even more importantly, knowing what your business has in both the plus and minus columns creates a fuller image of its overall financial health.
A clear image of your finances shows you how prepared you are to handle debt in times of uncertain or volatile business profit. After all, you probably won't make a killing every quarter; when your bottom line is a little smaller than anticipated, knowing what assets you have to pull from to pay your bills is a must. Accounting software from Skynova can make that job even easier.
In this article, we'll guide you through what total assets are and how to calculate them so you can apply for a loan, meet with investors, and be prepared for a less-than-stellar accounting period.
What Are Assets?
Assets are anything your business owns that are financially valuable in some way, even if they can't be converted into cash immediately. Actual cash is an asset, of course, but so is what you have in your office: furniture, computers, tools or trade equipment, and even the office or building should you own rather than rent. Once your business is established, you can even bank on your name and the brand you've built around it.
These and other assets can serve to offset your debts should a bill come due before you have sales-related income to cover it. You're probably familiar with this concept; anyone who has a savings account knows about stowing a little bit away for a rainy day. That jar of coins in the corner of your living room? On a very basic level, it's the same thing. That "just in case" money is an asset.
When it comes to business, there are several types of assets you can have:
Your business's current assets are resources you'll probably use within a year. This is actual cash or something that can be easily converted into cash. Because they're your most liquid assets, current assets are the quickest way to offset any bills or debt your business incurs. Current assets can include:
- Cash and cash equivalents (cash equivalents can include money market funds and short-term bonds or other short-term investments)
- Business inventory (beyond supplies, business inventory includes office furniture and equipment like copiers and printers)
- Accounts receivable (money others owe to your business)
Fixed or Long-Term Assets
Your long-term or fixed assets are those you'll tend to have for more than a year. As a result, they're also sometimes called noncurrent assets. While they aren't as easy to turn into cash as supplies and inventory, they still add to your company's liquidity (the ability to convert assets to cash). Fixed or long-term assets include:
- Real estate properties
- Machinery and heavy equipment
- Trademarks and trade names
- Long-term investments
Intangible assets are a nonphysical type of value your business can hold. While it may feel easier to assess the value of physical assets, such as company vehicles and equipment, intangible assets, like all noncurrent assets, are worth paying attention to. They can have worth beyond a simple cash value and be brought to bear not only to offset debt but also to pivot your business or brand in a new or uncertain marketplace. Intangible assets include:
- Goodwill — the value of your brand and its name (you can leverage how people feel about your business)
What Is Depreciation?
Depreciation is the decrease in value of an item over time. When it comes to creating your company's balance sheet, the depreciation of your assets is something you'll need to account for when recording the value of each item. While there are different methods for calculating depreciation, the concept remains the same: The assets you own may no longer be worth what they were at the time of purchase.
Before you list your assets on a balance sheet, you'll need to determine the current fair market value (FMV), as opposed to how much the asset was worth when you acquired it. Adjusting the price of your assets for all accumulated depreciation gives you their book value, or the value you actually record on your balance sheet.
The neatest example of depreciation is a company car. Purchased new, this vehicle may have been worth $25,000. Normal wear and tear associated with daily or weekly use means the value will drop, and you won't be able to resell it for the same price at which you bought it. A used car is cheaper than a new car for that reason: It's already been used.
When calculating your total assets, factoring in depreciation will require a bit of research for each item. It may also require consulting with a business accounting professional, as well.
How Do You Calculate Total Assets?
It's good to know you have money in the bank and other assets that can serve you in a time of financial uncertainty, but do you have enough to cover the money your business might owe?
Calculating your total assets answers that question and gives you a clear image of your business's actual financial health. To do so, you'll use the following formula, known as the balance sheet accounting equation, to make sure your pluses equal your minuses:
Calculating the total assets your small business possesses is fairly simple, especially when you keep track of your financial data with Skynova's accounting software. You'll have your purchase receipts, income statements, and other information on hand. Keeping your records neat, organized, and easy to access makes every accounting task that much faster.
Let's take a look at each step of how to calculate your total assets:
Create a Balance Sheet
A balance sheet is a financial statement that lists your company's assets, liabilities, and equity in one place. To create a balance sheet, you'll gather asset, liability, and equity information and then input the data accordingly. From there, you can usually adjust your balance sheet as needed at the end of different accounting periods, whether monthly, quarterly, or yearly.
The purpose of creating a balance sheet is to ensure that each side of the above equation is balanced. It's called a balance sheet for a reason: The equation must show that your assets can cover your debts. Should you close your business and liquidate all assets, will that money be enough to pay off what you owe? That's what you need to find out as the value of your assets or the amount of your debt fluctuates.
Determine Total Assets
When you create your balance sheet, you'll list each asset and its amount. This will include current assets like cash, inventory, and any outstanding invoices from clients; fixed assets like the value of your equipment or machinery and real estate; financial assets like investments; and intangible assets like your brand and even domain name. Add them together and you'll have your total assets.
If the owner of Harrison's Cybersecurity Solutions wants to create a balance sheet, for instance, they'll need to do an inventory of everything valuable that the business owns. Laptops, computers, and other equipment are assets, as are the office furniture, the building in which the office is located, the company car, the brand's goodwill, and even the business name (since someone else named Harrison might be interested in purchasing the name to use for their own business).
When calculating total assets, the owner of Harrison's will research the fair market value of each asset, which involves accounting for any depreciation or decrease in value. Once the owner has found the current value of each asset, let's say that they will determine their current assets amount to $315,600.
Determine Total Liabilities
Liabilities are financial obligations or debts your business has incurred. Your total liabilities are divided into different types, much like assets, and they equal the amount of debt your business carries overall.
Current liabilities include rent and utilities, taxes, and employee wages, which — like current assets — come due inside a 12-month period. Long-term liabilities, those extending beyond a single year, are long-term debts, including loans and mortgages. As with assets, you'll list your liabilities on your balance sheet and total them.
The owner of Harrison's Cybersecurity Solutions gathers all current financial statements related to their liabilities to continue creating their company's balance sheet. Their current or short-term liabilities include utilities for the office, accounts payable or money owed to other companies for services rendered, and the wages for three full-time employees. The owner's long-term liabilities include the mortgage for the office building and the loan on the company car. When they total these out, let's say they find their total liabilities to be $110,000.
Determine Stakeholders' Equity, Stockholders' Equity, and Owner's Equity
Equity is the net worth of your business. Should you close your business, liquefy your assets, and pay off your debts, what you'll be left with is the equity or final net income from the business. If you have stockholders, stakeholders, or other investors, the stakeholders' equity or stockholders' equity is their share of that profit. The owner's equity is the amount you and any partners will share from the sale of all assets.
Once the owner of Harrison's has gathered, recorded, and totaled all assets and liabilities, calculating their equity is quite simple. The balance sheet equation still applies:
In other words, what you're left with after you use your pluses to pay off your minuses is your final plus. Because Harrison's is owned by a single individual and has no stockholders or shareholders, all equity or final profit comes to the owner. Once they subtract their total liabilities ($110,000) from their total assets ($315,600), their equity comes to $205,600.
Inputting these numbers into the original equation of total assets = liabilities + equity, the owner of Harrison's gets:
Maintain a Current Balance Sheet With Skynova
Accurate and consistent financial reporting can make or break a business. If you don't have a handle on how much money you make or the assets you can draw on, it's quite easy to overspend and accrue debt that your business can't handle.
Help your business succeed by using Skynova's accounting software to regularly update your balance sheet. Use our business templates and software products to keep everything from invoices and receipts to tax information right at hand.
Notice to the Reader
As always, Skynova's business accounting articles are meant as general guidelines. They may not always apply to your specific situation or industry. Remember to consult with a business accounting professional to ensure you're meeting current accounting standards and approved practices.