Home Business What Are Accounts Receivable and Inventory?

What Are Accounts Receivable and Inventory?

by gbaf

In economic accounting, an asset is something that an entity owns or controls and which produces or provides value to the entity. It is generally anything that is held or that can create positive value to an entity and this property is usually held by an entity and can create value for that entity. An asset may be a tangible item like a plant, building, inventory, gold or water. It can also be a non-tangible asset like intellectual property or contractual obligations. Some types of assets are more difficult to categorize because some intangible assets do not directly produce or have any value in terms of production.

There are two major categories of assets, fixed assets and variable assets. Fixed assets are those assets that will increase in value, such as gold, currencies, bonds, stocks, and other securities. Variable assets on the other hand, are those that do not increase in value, but might, such as futures, options, warrants, and Covered Call Accounts.

A fixed asset may be a plant, building, and equipment that does not depreciate in value like the physical plant or building, but it does create a financial value to the owner because it is a physical asset. Some examples of fixed assets are accounts receivable, accounts payable, and loans. On the other hand, a variable asset may be an asset that might decrease in value, like inventory and fixed capital. Examples of variable assets are cash, marketable securities, accounts receivable, and loans.

In order to understand what is an asset, it is important to know what is a liability for financial reporting purposes. In most cases, when people speak of liabilities they are referring to financial burdens that an entity has created against itself. For example, if an entity takes a personal loan and uses the funds for nonbusiness related expenses, it is a liability. Likewise, if an entity takes a property tax deduction and then forgets to pay it, the property has become a liability. Liabilities create risks for creditors, who must compensate themselves by selling their accounts receivable, and banks, who must compensate their depositors for the losses on their deposit balances.

The two types of liabilities, however, go beyond the simple distinction between liabilities and assets. While liabilities create risks for a company or organization, assets create opportunities. In order to understand what is an asset, it is important to understand what is a liability for accounting purposes. For example, stock, whether directly held in the hands of the shareholders, or owned by the bank itself, represents a liability.

Another question to ask yourself as you begin to understand what is an asset and what is a liability is how long an asset last. Assets last only until the company decides to sell, give the asset to another business, or use it as a liability. Long-term liabilities, such as accounts receivable or inventory, are considered long-term assets. Likewise, assets such as plant, equipment, property, and property leased from tenants are considered assets. As with liabilities, these assets must be considered over time. A property, for example, may need to be financed over several years in order to generate the revenues that will allow you to pay off the loan.

You should also ask what is an asset for accounting purposes if you are unsure whether a particular asset, such as goodwill, is actually worth buying or holding because the market value is higher than the balance. For instance, suppose that the market value of your property is one thousand dollars, but the balance owing on your mortgage is seven thousand dollars. You could deduct the seven thousand dollars in interest you owe on your mortgage, allowing you to owe less money to your lender. However, if you were to sell your property and not use the funds to repay your loan, you would lose your asset, your liability would remain unchanged, and your liability would grow due to inflation. Therefore, although you might sell your asset for more money than it would be worth today, your mortgage debt would increase, as would your taxable income, your estate tax liability, and so on.

Accounts receivable and inventory are two of the most important categories of assets for accountants to track. The balances of accounts receivable and inventory represent both the payments that the customer receives for products sold and the net amount of refunds that the company receives for goods that are returned. Many businesses also track inventories by creating a “receivables” section on their financial statements. All of these categories are essential components of sound accounting practices, but what is “accountable” really depends upon the account and the type of reporting done.


You may also like