Asset Accounts Explained
There are several different sub-groups in your Assets and identifying them correctly will make your Balance Sheet much easier to understand.
1. Bank and Cash Accounts
Bank and Cash Accounts are the most liquid of all assets and will appear at the top of the Balance Sheet.
Bank Accounts and third-party entities such as PayPal, Swipe, eWay and Square should be identified as Bank Accounts. Another such account would be Petty Cash, or Cash in Hand. Some businesses have an account called Banking or Undeposited Funds, where they record cash payments that have not yet been banked into the bank account. If your business operates Tills, they would be included in this category also, and they would typically have a Cash Float that is maintained as a minimum balance for each Till.
2. Current Assets
The next most liquid group of assets are Current Assets. Typically, these assets can quickly be turned into cash and would include your Debtors or Accounts Receivable. If your business maintains Stock, this will also be a Current Asset.
Some businesses keep track of Prepayments, which are bills paid in advance. An example of this would be where an annual payment is made, such as insurance. Each month, the business tracks how much of the bill pertains to a future period. For example:
The business makes a payment of $600 as an annual insurance premium on the 1st of January. They calculate that the insurance is costing the business $50 per month. At the end of January, they allocate $550 of the insurance premium to Prepayments, which takes it out of the Profit and Loss and assigns it to the Balance Sheet.
The benefit of this is that they can attain a more accurate picture of the business’s profit for that month, instead of having a large insurance expense showing in January and then not appearing for the next 11 months.
Each month, they would drawn down $50 from the Prepayments in the Balance Sheet and apply it to Insurance in the Profit and Loss.
Since Prepayments records bills paid in advance, it is an Asset to the business. Theoretically, should the insurance no longer be required, the Prepayment could be cashed in and a refund obtained from the Insurer.
3. Non Current Assets
Most other assets are Non Current, meaning they are not easily turned into cash. They include Plant and Equipment, Motor Vehicles, Office Equipment, Real Estate. Typically, Non Current Assets are depreciated over time. The Balance Sheet should show the Non Current Asset and the Accumulated Depreciation for that Asset, giving the business an accurate indication of the current value of the Asset.
4. Balance Sheet Example
When you allocate your Assets correctly, interpreting the Balance Sheet becomes much easier. A good Balance Sheet would look something like this:
Mobile: 0408 806 180 Email: firstname.lastname@example.org Website: www.bookiebookkeeping.com.au