As many of my pals, asked me to explain assets with the same example (Boutique business) which I have used to explain balance sheet, I am using the same example to explain assets and liabilities.
PS: Please ignore former hospital example used.What are ASSETS?Technically, Assets are something which can be owned by a company to create some economic resource. Assets are classified into two types.
a. CURRENT ASSETS:These are the assets which are expected to be converted into a cash within a year.
b. FIXED ASSETS: These are the assets which are bought for long-term benefits and cannot be converted into cash immediately.
Consider the same boutique stores to understand about types of assets.
Let us brainstorm about the necessities(assets) required to start boutique stores.
You need a piece of land or a shop to put up a store, wallpapers, Tube lights, decorative items, mannequins, Carpets, Computers, Air conditioners, sewing machines, Cloth to make clothes.
The boutique also needs some products to maintain cleanliness and hygiene around the surroundings. For this purpose, we need Fragrant room sprays, as we are dealing with clothes, there is a probability of occurrence of Termites. So, we need to be precautious and make use of Naphthalene balls which comes under our requirements.Now we have a brief idea about the essential commodities of a boutique, let us classify them into current assets and fixed assets.
Current assets:The Naphthalene balls, Wallpapers, Decorative items like (China grass, Candles, artificial saplings, mini lights etc.), cloth from factory, carpets, Fragrant room sprays are said to be current assetsThese assets are recurring in nature and they are taken on the timely basis.
For example, you buy a ton of cloth for a month or two but you will not buy it for a longer period of time, most likely for about ten years. You will buy cloth whenever it is necessary based on the requirement and also based on fashion today. It is same with Naphthalene balls, Wallpapers, Decorative items like (China grass, Candles, artificial saplings, mini lights etc.)
Fixed Assets:Land, buildings, Computers, Sewing machines, Mannequins are said to be fixed assets. They are non-recurring in nature and are fixed. They are not used on the timely basis. Their use to the organization is almost all the time. Indeed, a boutique makes its profits out of this equipment.
For example, An Sewing machine which is bought is fixed to one corner in the boutique. The machine will not be replaced in a month or two. The purpose of the machine is long term and it is not replaced until it is completely damaged. The use of an asset which is long-term is said to be FIXED ASSET.
The Cloth used in a Sewing machine is a CURRENT ASSET and the machine is the FIXED ASSET.
In a niche, the current asset is something which is the priority of any business that is, no organization cannot survive without these basic requirements wherever as the fixed asset is something by which as an organization makes the profit.
This is all about the assets which are mentioned on a balance sheet.
I hope you have enjoyed reading about the asset classification and I also hope this might have helped you to some extent.
The LIABILITIES classification and CAPITAL will be explained in the next post.
Until then,
Have a great time
Sneha Polapragada.😃😃😃😃😃
