Accounting for Assets

Assets are one of the most important items on your balance sheet. Whether you’re using your company’s assets to help grow revenues or you’re employing them as collateral when you take out a loan, there are a broad range of uses for assets in accounting. However, there are many different types of assets, and many people aren’t aware of the distinctions between them. Explore the definition of assets in accounting & find out about the types of assets in our comprehensive guide.

An asset is any resource with financial value that is controlled by a company, country, or individual. There is a broad range of assets that your business may own, create, or benefit from, including real estate, cash, office equipmen, goodwill, investments, patents, inventory, and so on. Your balance sheet lists all of your company’s assets and explains how they are financed, i.e., whether through debt, equity, or owned outright.

When we speak about assets in accounting, we’re generally referring to six different categories: current assets, fixed assets, tangible assets, intangible assets, operating assets, and non-operating assets. Your assets can belong to multiple categories. For example, a building is an example of a fixed, tangible asset.?

It’s important to make sure that you’re classifying your assets properly, otherwise, you could run into problems. The correct classification of fixed assets in accounting can help you to properly gauge your business’s net working capital, whereas understanding the difference between tangible and intangible assets is an important element of assessing risk and solvency.

Here’s a little more information about the different types of assets with examples:

Current assets

Current assets are assets that can be converted to cash or cash equivalents within the space of one year. They are also referred to as “liquid assets” owing to their importance for your business’s liquidity. Here are some examples of current assets:

• Cash and cash equivalents
• Accounts receivable
• Marketable securities
• Inventory
• Short-term investments

Fixed assets

Fixed assets cannot be converted to cash or cash equivalents within the space of one fiscal year. They are also referred to as “non-current assets” or “long-term assets.” Here are some examples of fixed assets:

• Real estate
• Patents
• Equipment, tools, and machinery
• Furniture
• Long-term investments

Tangible assets

Tangible assets are assets with some kind of physical presence. Here are some examples of tangible assets:

• Real estate
• Cash
• Office supplies
• Vehicles
• Equipment, tools, and machinery

Intangible assets

Intangible assets are assets that aren’t physical but offer long-term value to your company. Here are some examples of intangible assets:

• Trademarks
• Brand recognition
• Goodwill
• Research and development
• Patents

Operating assets

Operating assets are assets that enable your business to generate revenue via your core business operations. Here are some examples of operating assets:

• Equipment, tools, and machinery
• Cash
• Real estate
• Patents
• Inventory

Non-operating assets

Non-operating assets are assets that do not help your business generate revenue via your core business operations but may still help you generate income in other ways. Here are some examples of non-operating assets:

• Unused land
• Marketable securities
• Unallocated cash
• Short-term investments
• Spare equipment

Accounting for Assets

Accounting for assets involves recording, managing, and reporting an organization’s resources that hold economic value and can generate future benefits. Proper accounting for assets ensures that financial statements accurately reflect the company's financial position.An Assets jornal is a record of all transactions related to a company's assets. Assets can include cash, inventory, property, equipment, and receivables. In accounting, when you record a transaction in an asset account, it typically involves a debit entry because an asset increase is recorded as a debit. A credit is recorded if an asset decreases.

Steps in Accounting for Assets

1. Asset Acquisition (Initial Recognition)

When a business acquires an asset, the cost of the asset (purchase price, plus any related costs such as transportation, installation, etc.) is recorded in the relevant asset account.

2. Subsequent Costs (Enhancements or Maintenance)

• Capitalized costs: If the subsequent costs improve the asset's efficiency or extend its life, they are added to the asset account.
• Expensed costs: Routine maintenance and repairs that do not enhance the asset's value are recorded as expenses.

3. Depreciation (Accounting for Depreciation)

Depreciation allocates the cost of a tangible fixed asset over its useful life. It reflects the wear and tear or obsolescence of assets.

• Depreciation Expense reduces the company’s profit.
• Accumulated Depreciation reduces the book value of the asset on the balance sheet.

4. Revaluation (If applicable)

If an asset increases in value over time (e.g., land or buildings), the asset can be revalued to reflect its fair market value. This typically applies to fixed assets under the revaluation model (per accounting standards like IFRS).

Revaluation of Land

If the value of land purchased for KSh 1,000,000 appreciates to KSh 1,200,000, the revaluation is recorded as follows:

5. Impairment (Loss of Value)

Impairment occurs when the carrying amount of an asset exceeds its recoverable amount. If an asset is impaired, the difference between its carrying amount and its recoverable amount is written off.

Impairment of Equipment

If the equipment’s fair value falls to KSh 150,000 due to technological obsolescence, the company would record the impairment as follows:

6. Disposal of Assets

When an asset is sold or disposed of, the company must remove the asset and its accumulated depreciation from the books. Any difference between the asset’s book value and its selling price is recorded as a gain or loss on disposal.

Selling Equipment

Let’s assume the company sells the equipment for KSh 300,000 after 3 years of use. The equipment had a purchase cost of KSh 500,000 and accumulated depreciation of KSh 300,000 (3 years of KSh 100,000 depreciation).

• Book Value = KSh 500,000 (Cost) - KSh 300,000 (Accumulated Depreciation) = KSh 200,000
• Selling Price = KSh 300,000

Since the selling price exceeds the book value by KSh 100,000, the company recognizes a gain.

7. Presentation in Financial Statements

• Balance Sheet: Assets are listed under current and non-current assets. Non-current assets are shown net of accumulated depreciation.
• Income Statement: Depreciation and any impairment losses are recorded as expenses.
• Cash Flow Statement: Purchase and disposal of assets are reflected in the investing activities section.

The Assets Journal Entries

An Assets jornal is a record of all transactions related to a company's assets. Assets can include cash, inventory, property, equipment, and receivables. In accounting, when you record a transaction in an asset account, it typically involves a debit entry because an asset increase is recorded as a debit. A credit is recorded if an asset decreases.

Key Elements of an Asset Account Journal:

1. Date: The date when the transaction occurred.
2. Description: A brief explanation of the transaction (e.g., equipment purchase, cash received).
3. Debit: The amount debited to the asset account (when the asset increases).
4. Credit: The amount credited to the asset account (when the asset decreases).
5. Account Name: The name of the asset account affected (e.g., Cash, Accounts Receivable, Equipment).
6. Balance: The running balance of the account after each transaction.

Common Asset Accounts:

1. Cash: All cash-related transactions.
2. Accounts Receivable: Money owed by customers for sales on credit.
3. Inventory: Goods available for sale.
4. Prepaid Expenses: Payments made for expenses before they are incurred (e.g., insurance, rent).
5. Property, Plant, and Equipment (PPE): Long-term assets such as buildings, machinery, and equipment.
6. Investments: Long-term or short-term investments the company holds.

Examples of Journal Entries in Asset Accounts

1. Purchasing Equipment:

• Date: September 28, 2024
• Description: Purchased machinery for cash
• Debit: Equipment (asset account) Ksh10,000
• Credit: Cash (asset account) ksh10,000
• Balance: Adjusted for both cash and equipment.

2. Receiving Cash from Customers (on Accounts Receivable):

• Date: October 1, 2024
• Description: Customer paid an outstanding invoice
• Debit: Cash (asset account) ksh5,000
• Credit: Accounts Receivable (asset account) ksh5,000
• Balance: Adjusted for both cash and receivables.

3. Recording Depreciation on Equipment (Reduction in asset value):

• Date: October 31, 2024
• Description: Monthly depreciation on equipment
• Debit: Depreciation Expense ksh1,000
• Credit: Accumulated Depreciation (contra asset account) ksh1,000

4. Selling Inventory for Cash:

• Date: November 2, 2024
• Description: Sold inventory for cash
• Debit: Cash (asset account) ksh2,500
• Credit: Inventory (asset account) ksh2,500
• Balance: Adjusted for both cash and inventory.

When dealing with assests that include VAT (Value Added Tax), the journal entries need to account for both the cost of the asset and the VAT paid. VAT is typically considered an input tax when purchasing assets for business use, meaning it can usually be reclaimed if the business is VAT-registered.

Key Components:

1. Cost of the Asset: The base price of the asset before VAT.
2. VAT Paid: The VAT portion of the purchase, which can often be claimed back as an input tax.
3. Total Payment: The total amount paid, including both the cost of the asset and VAT.

1: Purchase of Equipment

Let’s say a business purchases equipment worth KSh 100,000, with VAT at 16%. The total cost, including VAT, will be KSh 116,000.

• Cost of Equipment (excluding VAT) = KSh 100,000
• VAT (16%) = KSh 16,000
• Total Payment = KSh 116,000

Explanation:

• The asset account (Equipment) is debited with the cost excluding VAT (KSh 100,000).
• The VAT Input account is debited with the VAT amount (KSh 16,000). This is the amount you can reclaim from the tax authority.
• The Cash or Bank (or a Payables account if bought on credit) is credited with the total payment made (KSh 116,000).

2: Purchase of a Vehicle

Assume a business purchases a vehicle for KSh 1,000,000 with VAT at 16%. The total cost, including VAT, is KSh 1,160,000.

• Cost of Vehicle (excluding VAT) = KSh 1,000,000
• VAT (16%) = KSh 160,000
• Total Payment = KSh 1,160,000

Recording Depreciation for VAT-Inclusive Assets

The asset (e.g., equipment, vehicle) will be depreciated based on the purchase cost excluding VAT. Depreciation entries should not consider VAT since VAT is treated separately in the Input VAT account.

Depreciation (Using Equipment Example):

Assume the equipment is depreciated on a straight-line basis at 10% per year.

Reclaiming VAT (Input VAT):

If the business is VAT-registered, the VAT Input recorded can be claimed against VAT Output when filing VAT returns with the tax authority. If not, the business would bear the cost of the VAT, and it would not be reclaimable.

Conclusion:

These are simplified entries, but they demonstrate how asset accounts are recorded in a journal. Each asset transaction should reflect an increase or decrease in the appropriate account, with corresponding debits and credits.

When dealing with assets and VAT, it's essential to separate the asset cost from the VAT paid in your journal entries. The asset is recorded at its net cost, and VAT is recorded in the VAT Input account, which can later be reclaimed from the tax authority (if eligible). Proper recording ensures accurate bookkeeping and easier tax reconciliation.