What are Definition of Assets
Assets are economic resources which are owned by a business and are expected to benefit future operations. Assets may have definite physical form, as do buildings, machinery, and an inventory of merchandise. On the other hand, some assets exist not in physical or tangible form but in the form of valuable legal claims or rights; examples are amounts due from customers, investments in government bonds, and patent rights.
One of the basic and at the same time most controversial problems in accounting is determining dollar values for the various assets of a business. At present, generally accepted accounting principles call for the valuation of assets in a balance sheet at cost, rather than at appraised market values. The specific accounting principles supporting cost as the basis of asset valuation are discussed below.
The Cost Principle. Assets such as land, buildings, merchandise, and equipment an typical of the many economic resources that will be used in producing income for the business. The prevailing accounting view is that such assets should be recorded at their cost. When w< say that an asset is shown in the balance sheet at its historical cost, we mean the dollar amount originally paid to acquire the asset; this amount may be very different from what we would have to pay today to replace it.
For example, let us assume that a business buys a tract of land for use as a building site, paying $100, 000 in cash. The amount to be entered in the accounting records as the value o1 the asset will be the cost of $100, 000. If we assume a booming real estate market, a fail estimate of the sales value of the land 10 years later might be $250, 000. Although the markel price or economic value of the land has risen greatly, the accounting value as shown in the accounting records and in the balance sheet would continue unchanged at the cost of $100, 000. This policy of accounting for assets at their cost is often referred to as the cost principle oi accounting.
In reading a balance sheet, it is important to bear in mind that the dollar amounts listed dc not indicate the prices at which the assets could be sold nor the prices at which they could be replaced. One useful generalization to be drawn from this discussion is that a balance sheet does not show “how much a business is worth”.
The Going Concern Assumption. It is appropriate to ask why accountants do not change the recorded values of assets to correspond with changing market prices for these properties. One reason is that the land and building being used to house the business were acquired for use and not for resale; in fact, these assets cannot be sold without disrupting the business. The balance sheet of a business is prepared on the assumption that the business is a continuing enterprise, a “going concern”. Consequently, the present estimated prices at which the land and buildings could be sold are of less importance than if these properties were intended for sale.
The Objective Principle. Another reason for using cost rather than current market values in accounting for assets is the need for a definite, factual basis for valuation. Accountants use the term objective to describe asset valuations that are factual and can be verified by independent experts. For example, if land is shown on the balance sheet at cost, any CPA who performed an audit of the business would be able to find objective evidence that the land was actually valued at the cost of acquiring it. Estimated market value, on the other hand, for assets such as buildings and specialized machinery are not factual and objective. Market values are constantly changing, and estimates of the prices at which assets could be sold are largely a matter of personal opinion.
At the date an asset is acquired, the cost and market value usually are the same. The bargaining process which results in the sale of an asset serves to establish both the current.
Accounting Periods. The period of time covered by an income statement is termed Tt Company’s accounting period. To provide the users of financial statements with time! information, net income is measured for relatively short accounting periods of equal length This concept, called the time period principle, is one of the generally accepted accounting principles that guide the interpretation of financial events and the preparation of financii statements.
The length of a company’s accounting period depends upon how frequently managers investors, and other interested people require information about the company’s performance Every business prepares annual income statements, and most businesses prepare quarterly an monthly income statements as well. (Quarterly statements cover a three-month period and are prepared by all large corporations for distribution to their stockholders. )
The 12-month accounting period used by an entity is called its fiscal year. The fish year used by most companies coincides with the calendar year and ends on December 31. Som businesses, however, elect to use a fiscal year which ends on some other date. It may b convenient for business to end its fiscal year during a slack season rather than during a time o peak activity.
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