Question

Discuss the various classifications of assets on the balance sheet. Why are they important?

Answer 1

Assets of a business can be classified in following major four heads/types.

1.Fixed assets- In these Assets we include tangible and intangible assets capital nature assets. These assets held for production of goods and providing of service, not for sales.

•Tangible assets- building, furniture, land, plant, machinery and equipment etc

•Intangible assets- Patent, copyright, know-how, goodwill etc

2.Investment- In this head we shows the business and non business investment of money to earn interest, dividend and other investment incomes. This investment may be current or noncurrent/ long term investment.

3.Current assets- In this head we include all those assets which are held to run business operations and earn profit. These assets held for less than one year. Accounts receivable, Debtors, Inventory, cash and bank balance etc. example of this assets.

4.Miscellaneous assets- Deferred revenue advertisement expenses, deferred revenue research and development expenditure, preliminary expenses, Debit balance of income statement/profit and loss statementetc. items shouldbe include in this head of assets. These assets are fictitious assets.

We should classify all business assets in above four major heads because –

• There are different rules and regulation for each assets valuation, disclosure, verification etc.
• The business purposes, nature of assets are different for each asset.
• Organization makes different policy for purchase, sales, and uses of each type of assets.