Accounting Explained: Assets on the Balance Sheet
The balance sheet lays out a company’s assets, liabilities, and equity at a point in time. The first section of the balance sheet shows the assets, which are anything of value that a company can use to generate profit. This post will discuss some of the most common types of assets companies hold.
Cash
The most well-known asset is cash. Generally speaking, the more cash the better, as a company can use it to cover expenses, pay dividends to shareholders, or reinvest in the business to generate more profit.
Accounts Receivable
Another common asset is accounts receivable, which represent amounts unpaid by customers for services or goods that have already been provided. For example, rather than demanding payment up front, companies often sell goods on account, which gives the customer extra time to pay even after the goods are provided.
Example: A manufacturing company sells $100 of goods to a customer under the agreement that the customer pays the amount within 10 days of receiving the goods. After providing the goods, but before receiving payment, the manufacturing company recognizes a receivable worth $100. This illustrates the amount that they are entitled to receive. Once the customer pays the $100, the receivable goes off the books.
Inventory
Inventory consists of a company’s goods that are held for sale in the everyday course of business.
The term encompasses a wide range of goods, and the type of inventory depends on the nature of the business. Retail stores hold inventory in the form of shoes and clothes. Car dealerships hold vehicles as inventory, while a bakery’s inventory includes pastries.
Not all businesses need or hold inventory. Businesses in fields such as consulting, accounting, and law provide value to their customers through services and/or technical expertise, rather than through tangible goods.
Equity Investments and Debt Investments
Equity investments represent a piece of ownership of another company. Meanwhile, debt investments involve lending money to another party in exchange for repayment of the loan plus interest.
Both investments can prove useful to businesses looking to grow. Each come with their upsides and downsides.
Generally speaking, equity investments (stocks in publicly-traded companies) are riskier than debt investments. When one company buys equity in another, they share in the upside and downside of the investee (the company they invested in).
Unlike debt investments, which often pay fixed amounts of interest over time, equity investments don’t guarantee any income to investors.
However, equity investments allow more room for growth. While debt investments offer a predictable and safe rate of return, equity investments can earn far greater returns because they allow investors to share in the successes of the investee.