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Category: Category - Assets

If the question is focused on an “Asset” or is about “Assets” in general, please use this category.

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  1. This answer was edited.

    Yes, Nancy, there are few assets which show the credit balance. Those assets generally hold zero or unfavourable balance. Assets which have a credit balance In accounting perspective assets and expenses generally have a debit balance whereas liabilities, revenue and capital have a credit balance. YeRead more

    Yes, Nancy, there are few assets which show the credit balance. Those assets generally hold zero or unfavourable balance.

    Assets which have a credit balance

    In accounting perspective assets and expenses generally have a debit balance whereas liabilities, revenue and capital have a credit balance. Yet there exist a couple of assets which do have a credit balance those assets are known as contra assets.

    Contra Asset

    A contra asset is referred to an asset which generally has a zero or negative balance. Such an asset is used to offset or reduce the balance of the respective asset account with which it is paired to. Hence reducing or offsetting the amount of the respective asset account with the contra asset account gives us the net value of the respective asset.

    It acts as an asset holding credit balance. Contra assets are useful for the organization because it allows them to follow the matching principle by initially recording an expense in the contra asset account.

    Assets with a negative balance

     

    For Example- Max purchased an air conditioner from eBay for 4,00,000. The salvage value of air- conditioner is 30,000 and has an expected useful life of 10 years. On 31-12-yyyy, how much balance will be shown in the Accumulated Depreciation account.

    Calculation Part

    Annual Depreciation = (Value of Asset – Salvage value)/Estimated life of the asset.

    = (4,00,000 – 30,000)/10  => 37,000

     Dr                                       Accumulated Depreciation a/c                                     Cr

    DateParticularsAmountDateParticularsAmount
    31-12-yyyyBy Dep. a/c37,000
    31-12-yyyyBy Dep. a/c37,000
    31-12-yyyyBy Dep. a/c37,000
    31-12-yyyyBy Dep. a/c37,000
    Total1,48,000

    Net Asset value = Total asset value – Accumulated Depreciation

    = 4,00,000 – 1,48,000  => 2,52,000

    Placement in the Balance Sheet

    Assets with Negative Balance

    Here in the balance sheet “Accumulated Depreciation” shows a negative balance which is a contra asset and it is deducted from the respective asset account. Hence providing us with the Net value of the asset.

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    Sure, NK Designer, I would like to share the important key differences between Assets and Inventory. I hope this will help you in understanding and analyzing the concept better. Difference between Assets and Inventory- S.No. Basis of Difference Assets Inventory 1. Meaning Asset refers to the economiRead more

    Sure, NK Designer, I would like to share the important key differences between Assets and Inventory. I hope this will help you in understanding and analyzing the concept better.

    Difference between Assets and Inventory-

    S.No.Basis of DifferenceAssetsInventory
    1.MeaningAsset refers to the economic resources that are owned or controlled by an entity or business for deriving short-term and long-term future benefit.Inventory refers to the set of finished goods (or) raw materials used for manufacturing goods to sell them in the market.
    2.TypesAssets are classified into two types namely- Fixed and Current assets. Fixed Assets are further classified into Tangible and Intangible Assets.Inventory is classified into 3 types namely- Raw Materials, Work In Progress and Finished Goods.
    3.Period/DurationFixed Assets are kept in the business for a longer period whereas Current Assets are kept in business for a short period but they are not meant for immediate sale.Inventory is not kept in the business for a longer period. They are meant for immediate sale to generate revenue.
    4.ScopeAssets have a broad scope because they remain in the business for both long-term (Fixed Assets) and short-term (Current Assets).Inventory has a narrow scope because they are quickly converted into revenue by selling them.
    5.Key featuresi) Price (or) value.

    ii) Generates revenue for a longer period.

    iii) Maintenance cost.

    iv) Highly Durable.

    v) Subject to Depreciation.

    i) High liquidity

    ii) Readily accessible to end-users.

    iii) Contributes to working capital management.

    iv) Creates seasonal demand.

    v) Economies of scale.

    6.Methods of Valuationi) Cost Method.

    ii) Base Stock Method.

    iii) Fair value Method.

    iv) Standard Cost Method.

    i) FIFO Method.

    ii) LIFO Method.

    iii) Simple Average Method.

    iv) Weighted Average Method.

    7.Examplesi) Plant and Machinery.

    ii) Furniture.

    iii) Bills Receivables.

    iv) Sundry Debtors.

    v) Patents and Trademarks.

    i) Aluminium and steel for manufacture of utensils.

    ii) Flour for bakery production.

    iii) Crude oil for refineries.

    iv) Cotton for cloth production

    8.PresentationAll Assets are shown in the balance sheet on the assets side as a non-current and current asset.Inventory is shown on the credit side of the trading account and under the head current assets in the balance sheet.

     

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    First, let me explain you the meaning of the term Contra Assets. Meaning of Contra Assets The word contra means “opposite”. So, contra assets account have credit balance, whereas assets normally have debit balance. Contra asset is used to offset or reduce the balance of the corresponding asset accouRead more

    First, let me explain you the meaning of the term Contra Assets.

    Meaning of Contra Assets

    The word contra means “opposite”. So, contra assets account have credit balance, whereas assets normally have debit balance.

    Contra asset is used to offset or reduce the balance of the corresponding asset account in the balance sheet. Reducing or offsetting the gross value of asset with the corresponding contra asset will give us the net value of the asset. Contra asset can be referred as negative asset account.

    Examples of Contra Assets

    1. Accumulated Depreciation
    2. Accumulated Amortization
    3. Obsolete Inventory Reserve
    4. Reserve/Provision for Doubtful Debts

    Presentation in the Balance Sheet

    Contra AssetPresentation in the Balance Sheet
    Accumulated AmortizationReduced from the respective Intangible Assets under the head “Non-Current assets”
    Reserve/Provision for Doubtful DebtsReduced from Accounts Receivable/Debtors under the head “Current assets”
    Accumulated DepreciationReduced from the respective Tangible Assets under the head “Non-Current assets”
    Obsolete Inventory ReserveReduced from Inventory under the head “Current assets”

    For better understanding, let me take 2 examples from above – Accumulated Amortization & Reserve/Provision for Doubtful Debts, & demonstrate the presentation of the same in the extract of balance sheet.

    Example 1.

    Suppose ABC Ltd acquires a new computer software for 600,000 in the month of January 20×1. The estimated useful life of the software is 3 years with no scrap value.

    –As per the straight-line method, 200,000 will be written-off/reduced from the amount of computer software each year for 3 consecutive years.

    Year-endAmortizationAccumulated AmortizationNet Value of Computer Software
    20×1200,000200,000400,000 (600,000 – 200,000)
    20×2200,000400,000200,000 (600,000 – 400,000)
    20×3200,000600,000Nil (600,000 – 600,000)

    Example 2.

    The outstanding balance of debtors was 50,000 as on 31/12/20×2. Entity ABC Ltd anticipates doubtful recovery from some debtors on the basis of previous year’s experiences. Therefore, it decides to provide for 5% reserve for doubtful debts on its debtors.

    –So, 2,500 (50,000*5%) will be reduced from the amount of debtors as reserve/provision for doubtful debts as at 31/12/20×2.

    Presentation of Accumulated Amortization & Reserve/Provision for Doubtful Debts in the extract of balance sheet as at 31/12/20×2-

    Contra assets in balance sheet

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  1. This answer was edited.

    LIST OF FIXED AND CURRENT ASSETS FIXED ASSETS CURRENT ASSETS 1. PLANT & MACHINERY 1. CASH 2. LAND 2. CASH EQUIVALENTS 3. EQUIPMENTS 3. SHORT- TERM DEPOSITS 4. FURNITURE & FIXTURES 4. INVENTORY 5. VEHICLES 5.MARKETABLE SECURITIES 6. LEASEHOLD IMPROVEMENTS 6.OFFICE SUPPLIES 7. COMPUTER SOFTWARRead more

    LIST OF FIXED AND CURRENT ASSETS

    FIXED ASSETSCURRENT ASSETS
    1. PLANT & MACHINERY1. CASH
    2. LAND2. CASH EQUIVALENTS
    3. EQUIPMENTS3. SHORT- TERM DEPOSITS
    4. FURNITURE & FIXTURES4. INVENTORY
    5. VEHICLES5.MARKETABLE SECURITIES
    6. LEASEHOLD IMPROVEMENTS6.OFFICE SUPPLIES
    7. COMPUTER SOFTWARE7.TRADE RECEIVABLES
    8.BUILDINGS8. SHORT TERM BORROWINGS
    9. PATENTS9. ACCOUNTS RECEIVABLES
    10. TRADEMARKS10. PREPAID EXPENSES

    Presentation in the balance sheet

    Balance sheet of ABC Ltd. is as follows:

    balance sheet

    Hope this helps.

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  1. This answer was edited.

    To begin with, let me help you understand the meaning of the term Contingent Assets. Meaning of Contingent Assets Contingent Assets are possible assets or potential economic benefits because they do not currently exist but may arise in the near future. The shift from possible assets to real assets fRead more

    To begin with, let me help you understand the meaning of the term Contingent Assets.

    Meaning of Contingent Assets

    Contingent Assets are possible assets or potential economic benefits because they do not currently exist but may arise in the near future. The shift from possible assets to real assets for the entity is dependent on the occurrence or non-occurrence of future events which are not under its control.

    A tabular depiction of the recognition/disclosure principles for contingent assets has been presented below:

    Inflow of economic benefitsTreatmentRecognition/Disclosure
    Virtually certain ( > 95% probability)Not treated as Contingent AssetRecognized as an “Asset” in the Balance Sheet
    Probable ( > 50% – 95% probability)Treated as Contingent AssetDisclosure is made in the-
    a. Financial Statements (Notes to Accounts); orb. Report of the approving authority (eg. Board of Directors),

    as applicable.

    Not Probable ( < 50% of probability)Not treated as Contingent AssetDisclosure not permitted

    Examples of Contingent Assets

    Example 1.

    ABC Ltd filed a legal suit against its supplier XYZ Ltd for compensation against damages on non-supply of contracted goods. There is a possibility of ABC Ltd winning the case, as it has concrete evidences of contract violation by XYZ Ltd. The lawsuit has not been settled till the accounting year-end.

    –In this case, it is probable ( > 50% – 95% probability) that there would be an inflow of economic benefits (compensation for damages) to ABC Ltd in the near future. So, it will be disclosed as a contingent asset in the notes to accounts or board report (as applicable).

    Example 2.

    Suppose in the above example, the court orders XYZ Ltd to pay 100,000/- as compensation for damages. ABC Ltd has not yet received the money until the accounting year-end. Can it recognize this as a contingent asset?

    –The court has ordered the payment for damages. Although ABC Ltd has not received the payment till the accounting year-end, it is virtually certain ( > 95% of probability) that it will receive the compensation amount in the near future.

    ABC Ltd will now recognize the compensation amount as an asset in the financial statements and not disclose it as a contingent asset, as it is virtually certain.

    Example 3.

    Jute Ltd entered into a sale contract of 500,000 for the supply of jute during 20×2-20×3 with Textiles Ltd. During the transit, the truck carrying the jute for delivery met with an accident which destroyed the entire jute. The jute destroyed was covered under an insurance policy. The cost of the jute destroyed was 400,000. The policy prescribed acceptance of the amount of claim, amounting to 80% of the goods destroyed ie. 320,000 (80% * 400,000).

    Before the end of the accounting year, Jute Ltd received informal information from the insurance company that their claim has been processed and the payment has been dispatched for the claim amount.

    –In this scenario, there exist a possible asset (claim amount). Also, the inflow of economic benefits is probable ( > 50% – 95% probability) because Jute Ltd has received an informal information from the insurance company about the processing of the claim.  Therefore, Jute Ltd can treat and disclose this as a contingent asset in the notes to accounts or board report (as applicable).

    Example 4.

    A Road & Highway Developer enters into a contract with the Road & Highway Authority of India for completing a highway project. The agreed cost of total project was 10 million but the actual cost turned out to be 15 million. As per the terms of the contract, the Authority was mandatorily required to handover the land within a specific time period. But the Authority failed to do so. On account of delay in handing over of land, an excess cost of 5 million was incurred by the Developer.

    To recover the incremental cost incurred, the Developer filed litigation against the Authority for reimbursement of 5 million. The court has not yet given its final verdict. However, the Developer is sure that he will win the case.

    –In this example, the Developer will disclose 5 million as a contingent asset in the notes to accounts or board report (as applicable) till the court does not give its final verdict. This is because there is a probability of Developer winning the case as there has been a violation of terms by the Authority.

    Once the litigation is announced in favor of the Developer by the court, this will be recognized as an asset in the balance sheet of the Developer.

    Hope these examples have made your understanding of contingent assets very clear.

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  1. This answer was edited.

    An entity should not recognize a contingent asset in the financial statements. It can only be disclosed considering the probability of the inflow of economic benefits associated with the contingent asset. A tabular representation of the question asked – When, Where & How to disclose Contingent ARead more

    An entity should not recognize a contingent asset in the financial statements. It can only be disclosed considering the probability of the inflow of economic benefits associated with the contingent asset.

    A tabular representation of the question asked – When, Where & How to disclose Contingent Assets has been presented below.

    When, Where & How to disclose Contingent Assets

    Inflow of economic benefits (When)TreatmentRecognition/Disclosure (Where)Recognition/Disclosure (How)
    Virtually certain ( > 95% probability)Not treated as Contingent AssetRecognized as an “Asset” in the Balance SheetAsset will be recorded with the amount of inflow of economic benefits.
    Probable ( > 50% – 95% probability)Treated as Contingent AssetDisclosure is made in the-
    a. Financial Statements (Notes to Accounts); orb. Report of the approving authority (eg. Board of Directors),

    depending upon the requirement of local accounting standards.

    The entity shall give a brief description of the nature of the contingent assets at the end of the reporting period.

     

    If practicable, the entity shall also mention the estimate of the financial effect.

    Not Probable ( < 50% of probability)Not treated as Contingent AssetDisclosure not permitted

    Moving forward, let me also make you understand the disclosure with the help of an example.

    Example of Disclosure of Contingent Assets

    A fire broke out in the factory of ABC Jute Ltd destroying the entire jute worth 44,000,000. The jute destroyed was covered under an insurance policy. The policy prescribed acceptance of the amount of claim, amounting to 80% of the jute destroyed ie. 35,200,000 (80% * 44,000,000).

    Before the end of the financial year, ABC Jute Ltd received informal information from the insurance company that their claim has been processed and the payment has been dispatched for the claim amount.

    Suggest when, where & how to disclose this transaction in the financial statement.

    Solution-

    There is a possible asset (claim amount) & the inflow of economic benefits is also probable ( > 50% – 95% probability). Therefore, ABC Jute Ltd can treat and disclose this as a Contingent Asset. Disclosure shall be made in the Notes to Accounts or Report of Board of Directors, considering the requirements of the accounting standards.

    The following disclosure shall be made by ABC Jute Ltd as at the end of the reporting period:

    Notes to Accounts(Financial Statements)/Report of Board of Directors

    Contingent Asset

    ABC Jute Ltd has filed for the receipt of the insurance claim amount of 35,200,000 (44,000,000* 80%) to the insurance company, in respect of the jute destroyed.
    The inflow of economic benefits has been considered as probable because it has received informal information from the insurance company that their claim has been processed and the payment has been dispatched.

    Hope you got an insight into the disclosure requirements of Contingent Assets.

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  1. This answer was edited.

    Yes, investments are assets. First, let me familiarize you with the meaning of the term investments in order to understand its nature. Meaning of Investments Investments are assets or resources owned and controlled by entities. They provide future economic value to entities. They are held with an inRead more

    Yes, investments are assets.

    First, let me familiarize you with the meaning of the term investments in order to understand its nature.

    Meaning of Investments

    Investments are assets or resources owned and controlled by entities. They provide future economic value to entities. They are held with an intention to generate additional income or to benefit from the appreciation in value over time. 

    Examples of investments
    1. Investment in Mutual funds
    2. Investment in Government securities
    3. Investment in Debentures & Bonds
    4. Acquiring Shares of companies
    5. Acquisition of Land & Building to earn rentals or for capital appreciation
    6. Investment in Subsidiaries, Associates, and Joint Venture

    Analyzing the meaning of investments itself, we can conclude that investments are assets for entities acquiring them.

    Presentation of Investments in Financial Statements

    1. Long-term Investments

    Investments that are held for more than a period of 1 year are termed as Long-term Investments.

    Examples

    a. Investment in Real Estate to earn rentals or for capital appreciation
    b. Purchase of Debentures or Corporate/Government Bonds having a maturity period of more than a year
    c. Investment in Subsidiaries, Associates or Joint Venture

    Treatment in Financial Statements

    Financial StatementTreatment
    Balance SheetPresented as Long-term Investments in the balance sheet under the head “Non-Current Assets”

    2. Short-term Investments

    Investments that are held with an intention to dispose off within a period of 1 year are referred to as Short-term Investments. They are held primarily for the purpose of trading. They are also known as Marketable Securities.

    Examples

    a. Investment in Mutual Funds
    b. Acquisition of Shares of companies

    Treatment in Financial Statements

    Financial StatementTreatment
    Balance SheetPresented as Short-term Investments in the balance sheet under the head “Current Assets”

    An extract of the balance sheet has been attached for a better understanding of the presentation of investment.

    Investments in Balance Sheet

     

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  1. This answer was edited.

    List of Tangible and Intangible assets INTANGIBLE ASSETS TANGIBLE ASSETS 1. LEGAL FEES 1. PLANT & MACHINERY 2. PATENTS 2. CASH & CASH EQUIVALENTS 3. LICENSES 3. LAND & BUILDING 4. TRADEMARKS 4. EQUIPMENTS 5. FRANCHISES 5. FURNITURE & FIXTURES 6. GOODWILL 6. INVENTORY 7. COPYRIGHTS 7.Read more

    List of Tangible and Intangible assets

    INTANGIBLE ASSETSTANGIBLE ASSETS
    1. LEGAL FEES1. PLANT & MACHINERY
    2. PATENTS2. CASH & CASH EQUIVALENTS
    3. LICENSES3. LAND & BUILDING
    4. TRADEMARKS4. EQUIPMENTS
    5. FRANCHISES5. FURNITURE & FIXTURES
    6. GOODWILL6. INVENTORY
    7. COPYRIGHTS7. MARKETABLE SECURITIES
    8. BRAND EQUITY8. INVESTMENTS
    9. BROADCAST RIGHTS9. RAW MATERIALS
    10. RESEARCH & DEVELOPMENT10. VEHICLES

    Notes

    Intangible assets: (invisible)

    1. Legal fees – It is an intangible asset as it refers to the fees incurred in the registration of trademarks and patents.
    2. Patents – A patent is an exclusive right that is granted to an inventor by law which permits them to exclude anyone from producing, using, or selling their invention for a given period.
    3. Licenses – refers to a right that is purchased to operate a business.
    4. Trademark – refers to a legal right which protects the distinct identity of a company. It can comprise of a name, logo, slogan, or anything that depicts a company’s unique identity.
    5. Franchises – refers to a license/permission granted by the owner, under certain conditions, to produce or sell a product or service.
    6. Goodwill – refers to the reputation of a company which is determined by its profits and losses.
    7. Copyrights – It is an intellectual property right obtained by a creator usually in the fields of art, music, literary, etc, which restricts a person from publishing the content without the consent of the owner.
    8. Brand equity – refers to the value of the unique identity of a business. It can be positive or negative.
    9. Broadcast rights – refer to the rights obtained under a licensing agreement for broadcasting a program.
    10. Research & Development – includes the development of software and technological innovations of a company.

     

    Tangible assets: (visible)

    1. Plant & Machinery – used to convert raw materials into finished goods. They are recorded in the books of accounts at a depreciated value.
    2. Cash and Cash equivalents – It refers to the cash in hand and cash at bank. The cash equivalents are usually stated at the value they are convertible into cash.
    3. Land & Building – represents the ownership of a physical property of the business.
    4. Equipments – used in the production activities of a business.
    5. Furniture & Fixtures – refers to the movable equipment that is a part of the office layout.
    6. Inventory – refers to the valuable items which are usually stored in a warehouse with a plan of being sold or utilized in the process of production.
    7. Marketable securities – refers to the stocks, bonds, shares which can be easily converted into cash.
    8. Investments – refers to a liquid asset that is purchased with an expectation of being sold in the future.
    9. Raw materials – refers to the tangible materials used for manufacturing goods.
    10. Vehicles – The vehicles used by the proprietor such as a car or the trucks, tractors used for the operating activities of a business.

     

    Hope this helps.

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    What is Debit balance? While preparing a ledger account (T-account), if the sum of the debit side is greater than the sum of the credit side, then we say that the account has a "debit balance". Debit side > Credit side Assets have debit balance Let me help you understand this concept correlatingRead more

    What is Debit balance?

    While preparing a ledger account (T-account), if the sum of the debit side is greater than the sum of the credit side, then we say that the account has a “debit balance“.

    Debit side > Credit side

    Assets have debit balance

    Let me help you understand this concept correlating it with the golden and modern rule & with an example.

    1. Golden rule of accounting for real account (ie. assets like plant & machinery, furniture & fixtures, etc) is-

    Debit what comes in, Credit what goes out

    2. Modern rule of accounting states-

    Debit the increase in asset, Credit the decrease in asset

    Keeping this in mind, we will move forward to an example.

    Example for Asset A/c

    Samsung Inc. acquired 2 plant & machinery for 2,50,000. Out of the 2, it sold 1 for 1,00,000. Also, 20,000 depreciation was charged. So, the ledger account for plant & machinery will be presented as follows in the books of Samsung Inc.-

    Plant & Machinery A/c
    To Bank A/c2,50,000By Bank A/c1,00,000
    By Depreciation A/c20,000
    **By Balance c/d1,30,000
    Total2,50,000Total2,50,000

    With the purchase of 2 plant & machinery, there will be an increase in the overall assets of Samsung Inc. So, we will have to debit the purchase/increase in the asset. And on the sale of any asset purchased before, you need to credit the asset account.

    Therefore, in general, the debit side of an asset account will be > than the credit side, resulting into a debit balance.

    So, in this example, the above ledger shows the debit balance (debit side > credit side) in plant & machinery A/c (By Balance c/d – 1,30,000).

    What is Credit balance?

    While preparing a ledger account (T-account), if the sum of the credit side is greater than the sum of the debit balance, then we say that the account has a “credit balance“.

    Credit side > Debit side

    Liabilities have credit balance

    Again, let just interpret this concept correlating it with the rules along with an example.

    1. Golden rule of accounting for personal account (eg. creditors) is-

    Debit the receiver, Credit the giver

    2. Modern rule of accounting states-

    Credit the increase in liability, Debit the decrease in liability

    Keeping these rules in mind, let me help you know why liabilities have a credit balance with an example.

    Example for Liabilities A/c

    ABC Ltd purchased raw materials from its supplier XYZ Ltd for 5,00,000. During the month it could only make payments of 25,000 and 40,000 to the supplier. The remaining amount is still outstanding. So, the ledger account for XYZ Ltd (Creditors A/c) in the books of ABC Ltd will be presented as follows-

    XYZ Ltd A/c
    To Bank A/c25,000By Purchase A/c5.00,000
    To Bank A/c40,000
    **To Balance c/d4,35,000  
    Total5,00,000Total5,00,000

    XYZ Ltd has been credited with 5,00,000 because he is the supplier of raw materials (credit the giver). Also, ABC Ltd is now liable to pay 5,00,000 (credit the increase in liability). Then as and when we pay XYZ Ltd, there will be a decrease in the liability, therefore debit. The liability account will show a credit balance until we discharge the dues completely.

    So, in general, you will always see the credit side of the liability account to be > than the debit side.

    In this example, the above ledger shows the credit balance (credit side > debit side) in XYZ Ltd A/c (To Balance c/d – 4,35,000).

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  1. This answer was edited.

    Prepaid rent includes rent, therefore, you might be thinking that it is an expense, right? Clearing your assumption, that is incorrect. Prepaid rent is a current asset. In simple words, prepaid rent is recorded under current assets in the balance sheet because often businesses pay the rent before thRead more

    Prepaid rent includes rent, therefore, you might be thinking that it is an expense, right? Clearing your assumption, that is incorrect. Prepaid rent is a current asset.

    In simple words, prepaid rent is recorded under current assets in the balance sheet because often businesses pay the rent before the due date and it is utilized within a few months of its payment, usually within the same financial period. In the balance sheet, all the prepaid expenses that have not yet been consumed are recorded as a current asset about the time frame of one year.

    Prepaid Rent

    You can think of prepaid expenses as the costs that have been paid but are yet to be utilized. For example, prepaid rent, prepaid insurance, prepaid salaries, etc.

    When you make the payment of rent before its due date it is known as prepaid rent. Rent is usually paid in advance for multiple reasons such as availing a discount, is due on the first day of the month, the landlord demands a prepayment, etc.  For a better understanding of the concept have a look at the example given below.

    Example

    Company X signs an agreement to rent a warehouse for 1,000 per month from March for 7 months. The landlord demands for payment of the total amount in February. The journal entries to be recorded are as follows:

    FebPrepaid Rent a/cDebit7,000Debit the increase in asset
    To cash a/cCredit7,000Credit the decrease in asset

    (being rent paid)

    MarchRent Expense a/cDebit1,000Debit the increase in expense
    To prepaid rent a/cCredit1,000Credit the decrease in asset

    (being prepaid rent adjusted as it expires)

    Note: The total amount of rent (1,000 x 7) is initially recorded in the balance sheet under current assets as prepaid rent. Each month the asset account is reduced by the amount utilized. You have to decrease the asset account by 1,000 (7,000/7) and record the expense of 1,000.

    Prepaid rent as shown in the balance sheet

    (Extract of Balance sheet)

    Extract of Balance sheet

    Hope this helps.

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  1. This answer was edited.

    Negative Goodwill Yes, I believe goodwill can have a negative balance. We call this negative goodwill as "Bargain Purchase". It's a difference between the purchase price paid for an asset and its actual fair market value. Although you should know that it’s an extremely rare case scenario. Negative GRead more

    Negative Goodwill

    Yes, I believe goodwill can have a negative balance. We call this negative goodwill as “Bargain Purchase”.

    It’s a difference between the purchase price paid for an asset and its actual fair market value. Although you should know that it’s an extremely rare case scenario.

    Negative Goodwill v/s Goodwill

    I think if you get an idea of the difference between the two you will be in a better position to understand why it arises and what exactly does it mean.

    • Negative goodwill is exactly opposite to goodwill as while goodwill is favourable for the seller the bargain purchase is not favourable for his company
    • Negative goodwill arises when the purchase price of an asset is lower than its market value.
    • Whereas in the case of goodwill the purchase price is higher than its market value. To simply state it goodwill is a premium paid by the buyer for the assets of such another company.
    • While negative goodwill is favourable to the buyer the positive goodwill is favourable to the seller.

     

    In case of a bargain purchase the Purchase Price of an Asset < its Fair Market Value

    the above statement could be interpreted with the help of a below-mentioned example

    The company ABC faced financial distress for since a few years and hence the board of directors had only 2 alternatives left i.e either to sell the company or file for liquidation.
    The company was hence sold for an amount lower than its fair market value

    It is reflected from below mentioned illustration

    ParticularsPurchase ValueFair Market Value
    Inventory20,00040,000
    Trade Receivables40,00046,000
    Cash and Bank Balance50,00065,000
    Property plant and equipment1,50,000155,000
    Patents and Copyrights25,00035,000
    Assets285,0003,41,000
    Long term Debts65,00060,000
    Trade Payables20,00030,000
    Liabilities 85,00090,000
    Net Assets2,00,0002,51,000

     

    You would doubt that even though the goodwill can have a negative balance how shall it be presented in the Financial Statements. Moving ahead –

    Negative Goodwill in an income statement

    It should be recognized as a “gain on acquisition “ in the income statement of an acquirer.
    The below image would be of some help-

    The Gain on purchase of goodwill presentation in income statement

    Negative Goodwill in a Balance Sheet

    It can be shown as a part of liability or as a negative balance in the books of Seller Company since it unfavourable for such company whereas goodwill is shown as an intangible asset. Alternatively, such negative balance can also be shown as a negative balance under the intangible asset.

    I generally follow the alternative approach to present negative goodwill under the head of intangible asset but you can follow any method you are comfortable with since both are acceptable in the industry.

    If you are still confused about how to present negative goodwill in a balance sheet perhaps the below-stated example may be of some help
    Negative Goodwill in Extract of Balance Sheet


    Aastha Mehta

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  1. This answer was edited.

    Firstly, Nancy, the question put up by you is a bit vague. As in it is difficult to identify whether you have an issue in understanding an accounting concept regarding a loan given or loan taken. Moving ahead, I think I can answer the question stated below in two ways Is Loan a Current Asset? Case 1Read more

    Firstly, Nancy, the question put up by you is a bit vague. As in it is difficult to identify whether you have an issue in understanding an accounting concept regarding a loan given or loan taken.

    Moving ahead, I think I can answer the question stated below in two ways

    Is Loan a Current Asset?

    Case 1: If a Loan is Given

    Firstly you have to be clear whether the loan is a Loan granted or a Debt. When an entity lends a certain amount to another person based on certain conditions agreed by the parties at the time of entering into such contract. Then such a lender will recognise this transaction as a case of Loan Given.

    Case 2: If a Loan is Taken

    When an entity or a person owes a certain amount to another person or an entity or simply put up he has borrowed a certain sum from such another person based on certain conditions agreed at the time of entering into the contract such a transaction is a case of Loan Taken for the borrower.

    To classify such loan as a Current Asset or a Current Liability, you will need to first identify the tenure of such loan given or taken i.e whether it’s a Short term Loan or a Long term Loan.

    If you want to make an accurate classification pertaining to the head under which such loan would be presented it is very important to ascertain whether its a short term or a long term loan.

    Short term Loan

    It refers to a loan taken or given for a short duration of time roughly ranging between a month and a year these are generally repaid in monthly instalments. Such Short term Loans can be classified under the heads of Current Assets or Liabilities. If you are still unable to get the concept clear the below-mentioned table can be of great help –

    ParticularsClassification
    Short term Loan TakenCurrent Liability
    Short term Loan  GivenCurrent Asset

    Long term Loan

    A loan Taken or Given shall be said to be a Long term Debt or Long term Loan Given if such a loan is not due to be repaid or received within a year. It can be classified as a Non-Current Asset or a Liability.

    Similarly, refer to the table below for a better understanding of this concept

    ParticularsClassification
    Long  term Loan TakenNon-Current Liability
    Long  term Loan  GivenNon-Current Asset

    I am sure that after having a look at the image included below you will have a clear understanding of this concept-

    Classification of loan in a balance sheet


    Aastha Mehta

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    Yes, inventory is a current asset. Before moving to the main part of the question. I would like to familiarise you with few terms such as the meaning of inventory and current asset. I hope this answer will clear all your doubts related to this concept. Meaning of Inventory In simple terms, InventoryRead more

    Yes, inventory is a current asset. Before moving to the main part of the question. I would like to familiarise you with few terms such as the meaning of inventory and current asset. I hope this answer will clear all your doubts related to this concept.

    Meaning of Inventory

    In simple terms, Inventory (stock) is a tangible asset which refers to the stock of goods that is either available for sale in the form of finished products or raw material used in the production of goods meant for sale in some future period held by an enterprise.

    For example – A furniture dealer purchases wood, fibreglass, moulded plastic, wrought iron etc., for 1,00,000 from Amazon for manufacturing wooden chairs, sofa sets, dining tables, beds etc., then wood, fibreglass, moulded plastic, wrought iron would be considered as inventory.

    Meaning of Current Asset

    Current asset refers to all the assets of an organization which are expected to be used, consumed or easily sold through business operations within one accounting period (within a year). In simple terms, currents assets represent all the assets which can be encashed with one accounting period. Current assets are also known as short-term assets.

    For example – ABC and Co. purchases office tools and furniture from E bay on credit for 30 days then it will be considered as a bill receivable in the books of E bay. Hence bills receivable is treated as a current asset.

    Moving to the main part of the question

    Inventory as a current asset

    Inventory is treated as a current asset because the organization intends to sell them within one accounting period or 12 months from the date it is recorded in the balance sheet. All the current assets including inventory have high liquidity and convertibility.

    Inventory is a primary source of revenue, especially for wholesale and retail businesses. More than 50% of the working capital revenue is generated from inventory within a year. Therefore, it is recorded under the head – Current Asset.

    In terms of liquidity and convertibility inventory is placed somewhere in the middle of the scale of current assets. It is highly liquid as compared to the non-current asset (say land & building, plant & machinery).

    Placement in the Balance Sheet

    Inventory - Current Asset

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  1. This answer was edited.

    Meaning of Net Current Assets In simple terms, Net Current Assets refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can also be referred to as Net Working Capital. The Net Current Assets can have a positive or a negative value, wherein tRead more

    Meaning of Net Current Assets

    In simple terms, Net Current Assets refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can also be referred to as Net Working Capital.

    The Net Current Assets can have a positive or a negative value, wherein the two are an indicator of the well-being of a business. In case the current assets are greater than the current liabilities, the company possesses sufficient assets to pay off its indebtedness and is operating efficiently. However, a company is said to be facing financial difficulty and is not in a position to pay off its debts, when the value of net current assets is negative.

    The formula is as follows:

    Formula

    Difference between Net Current Assets and Current Assets

    Net Current Assets refers to the difference between the total amount of current assets and the total amount of current liabilities whereas Current Assets are a subpart of Net Current Assets and refer to those assets that are expected to be utilized, depreciated or traded through the operations of a business within the same financial year.

    For example, cash and cash equivalents, inventory, accounts receivable, etc are Current Assets whereas the summation of the same minus the total of current liabilities is termed as Net Current Assets which is further explained through an example given below.

    Numerical Example

    Calculate the Net Current Assets of ABC Ltd.

    (Extract of Balance Sheet)

    PARTICULARSAMOUNT
    CURRENT ASSETS
    Cash and Cash Equivalents2,00,000
    Accounts Receivables40,000
    Stock Inventory15,000
    Marketable Securities35,000
    Prepaid Expenses6,000
    TOTAL CURRENT ASSETS2,96,000
    CURRENT LIABILITIES
    Accounts Payable15,000
    Accrued Expense2,000
    Unearned Revenue20,000
    Taxes Payable40,000
    Short-term Debt10,000
    Interest Payable6,000
    TOTAL CURRENT LIABILITIES93,000

    Solution:

    Total current assets = 2,96,000

    Total current liabilities= 93,000

    Net Current Assets = Total Current Assets – Total Current Liabilities

    = 2,96,000- 93,000  = 2,03,000

    Key Takeaways

    • Net Current Assets are also known as Net Working Capital.
    • Net Current Assets is the difference between the total current assets and total current liabilities.
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