Understanding Assets On A Business Balance Sheet

When presented with a balance sheet for the first time, it seems to be a confusing list of numbers, both positive and negative, that to an accountant would spell out the company's financial health. Of course, if you're not working in the financial sector or untrained in reading basic financial accounts, it's hard to understand certain elements. Assets are one of these elements that most confuses people, so here is a brief introduction to them, and what they mean.

Assets are basically resources that are owned by the company. They are usually a good thing, but can be a red flag if the company seems to be in a lot of debt (it's the same in business as in life - you'd have to give up your assets or sell them in order to pay your debt, and if you're a company, you may well need the assets to continue - for example, if it was the company computers!).

The most obvious asset is cash (sometimes phrased as "in bank or at hand", in other words, money that the company can quickly get its hands on as part of its cash flow, rather than it being locked away somewhere). This is usually a good thing. A company with lots of cash can be seen as "liquid" - able to pay off debts and honour agreements, and also keep the day to day business running.

Inventory is another kind of asset, and it may be present on a balance sheet depending on the kind of company. Another word for inventory is stock- as usually these are assets or products that are to be sold on to customers. A supermarket, for example, would have a lot of inventory as part of its assets- i.e. everything it's got on the shelves. Some companies dealing in the service industry only (for example, an accountant!) wouldn't have inventory - they are selling their skills, not a product.

Property, machinery and equipment are another kind of asset that will almost always form part of a balance sheet. Very few companies can run without some kind of equipment - even if they are selling their services only (the accountant in the previous example would have stationary, an office full of furniture, a computer, accounting software and so on, many of which are classed as property). Again, depending on the type of company, property could form a large part of its assets - a paper mill would have masses of machinery (the factory), an average amount of inventory (the paper), and could have very little cash.

Finally, there are intangible assets. These usually are hard to pin a value on - patents and trademarks are a classic example. The company owns them, but they are neither stock, nor a service, nor cash, nor a tangible "thing" to sell, and the price is difficult to ascertain unless you know how much it's worth (brands are valued in this arbitrary way). However, without the trademark or brand, the company would obviously be making less profit. You can still read a balance sheet if you take out the intangible assets, and this would give you the "net intangible" worth of a company - probably a more reliable analysis than leaving the intangibles in.

Overall, assets are much easier to understand if you apply them to real-life examples, and break down how the company earns its profit. There are many more sections of a balance sheet to learn, but knowing the difference between kinds of assets can set you on the path to better financial understanding in business.