A few weeks ago, we began covering basic accounting terms that can be useful while preparing for accounting exams. Last time we covered bad debt. This time we will be covering assets.
There are two types of assets, fixed and current, and both are important in determining the present value of a company, as both need to appear on a balance sheet when reporting on earnings. To begin with, assets are anything that a company (or an individual) owns. In more detail, fixed assets are generally tangible items, but not thing which are the company’s product, so essentially the building the company owns, or equipment they use to manufacture their product. They are fixed in the sense that they are meant to last for a while.
Current assets on the other hand are monies that are meant to be processed as part of the company operating. Accounts receivable, for example, would be an example of a current asset. If the company sells a product, this too would be considered a current asset when still in possession of the company.
Fixed assets actually play an important role at both the macro, and the micro level. In the investment world, fixed assets developed by a country (think roads, stadiums, etc.) are used as a barometer for how their economy is performing. In an April article, increases in China’s fixed assets are sited as an indicator that their economy is stabilizing.
On the other hand, sometimes the word “fixed” is used quite literally. In a suit by General Motors over the loans provided to the company to bail them out as part of the 2009 financial crisis, General Motors disputes the entire validity of one of their loans based on the fact that some items, fixed assets, were not part of the security for the loan. Part of the trial actual debates whether or not equipment which is bolted down to the floor are “fixed” or not.
So, while on the surface, the different kinds of assets may not seem similar, often times fully understanding a term can lead to very different outcomes.