Question

Indicate which of the following items could appear as an asset on the balance sheet of a business. Explainyour reasoning in each case. (3 points)

1. €1,000 owed to the business by a credit customer who is unable to pay.
2. A patent, bought from an inventor, that gives the business the right to produce a new product. Production ofthe new product is expected to increase profits over the period during which the patent is held.
3. A recently purchased machine that is already being used by the business but it has been acquired on credit and isnot yet paid for.

Answer 1

a) €1,000 owed to the business by a credit customer who is unable to pay:

This is a bad debt for the business. It is a conta asset. These expenses will be reduced from the accounts receivables in the asset side of the balance sheet.

b) A patent, bought from an inventor, that gives the business the right to produce a new product. Production ofthe new product is expected to increase profits over the period during which the patent is held.:

Patents are listed as intangible assets, so it will appear in the asset side of the balance sheet.

According to accounting standards only those intangible assets which are acquired from another business or individual can be accounted in the asset side of balance sheet and not the internally generated intangible assets.

c) A recently purchased machine that is already being used by the business but it has been acquired on credit and isnot yet paid for.

The machine purchased on credit increases the accounts payable ( liability) as well as plant and machinery (asset).

Therefore, this will appear in the asset side of balance sheet under Plant and Machinery and under liability as accounts payable.