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In layman's terms, assets are anything that you own that is of value. In modern-day financial accounting terms, an asset is anything that is employed to make economic value for a company or an entity. Assets represent the value of ownership which is converted into monetary value upon sale or exchange. There are two basic types of assets: tangible and intangible. The difference between the two is how they are usually utilized. While tangible assets are typically equated to money, intangible assets are generally only represented by a book, newspaper, or computer file. Unsure how to categorize your assets? Contact Plentii.
In general, the less liquid an asset, the easier it will be to sell or trade. Therefore, businesses that have a lot of inventory should keep liquidating their inventory and accounts receivables. On the other hand, a business with little or no inventory should focus on sales and don't let non-liquidating assets like accounts receivables (AR) sit around.
To better understand the differences between the two types of assets, consider how property and cash flow are treated in a current-day flat sheet. Generally, when a company reports its income for the period that ended on the last day of the year, all assets are converted to "current assets." This includes "accounts receivable", "current equipment", and "property". The balance then becomes the difference between total assets and total liabilities. This conversion aims to provide the company with an accurate depiction of the current operating cycle. This balance is then converted to cash within one day to be used for the year's end.
On the other hand, when a company owns real estate assets, the balance sheet would not be prepared if those assets were converted to cash within one day because that asset would no longer be an investment. Real estate is considered to be a non-liquidating asset because it is not a marketable product that could be purchased or sold. A company typically sells real estate for tax purposes, so there isn't any need to convert those assets into cash within one day. Also, assets held by the company aren't necessarily liquidated. If there's a loan on a particular piece of real estate, for example, that loan may be continued even after the property has been sold.
There are two different ways that companies can use their retained assets to create long-term liabilities. First, they may have some fixed assets, such as plants and equipment, that produce cash flows that will continue for many years to come. For example, a business may own a fleet of trucks that consist of several new vehicles each year. Over the long term, that fleet of trucks could produce substantial profits for the business. However, that steady stream of lorries could easily result in a loss of cash flow, which would force a change in how the company handles its cash flow needs. In this case, the trucks' value would have to be adjusted upwards, and the company would have to incur an immediate cash outlay to replace those trucks. Plentii can do all these calculations for you.
The second method that companies can convert their retained assets into cash is by leasing them. Under this method, a company's owned assets are used as the basis for borrowing funds, which are then used to make purchases. This is done each quarter, and the amount of the lease payments is reflected in the company's financial statements for that quarter.
Some companies choose to convert their assets into cash to access their capital and finance growth. Suppose a firm owns a building containing a non-bookkeeping unit responsible for the inventory control and management of that building's assets. In that case, that firm can convert its non-bookkeeping asset holdings (such as furniture and electrical fixtures) into accounts receivable, which is then acceptable for collection on the debt owed. All of the asset balances, plus the interest received on the outstanding AR, are recorded as an equity element in the condensed financial statements of income for that period of time.
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When a firm wishes to sell one or more of its assets, it should consider whether its existing balance sheet provides sufficient cash to cover the transaction costs. If not, the cash value of the asset would need to be increased to cover the difference. Plentii offers complete bookkeeping and accounting services that will make this process a lot easier. The two methods of converting retained earnings, that are currently based on an interpretation of economic value and the purchase price of the existing assets, will convert into cash flow assets. The process of converting fixed assets (such as accounts receivable and inventory) into cash does not require consideration of the economic value or the assets' replacement cost.