What is the definition of total assets?

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What is the definition of total assets?
Look at the components of total assets to get a true picture of a company's worth. (Jupiterimages/Photos.com/Getty Images)

Assets are all the things of value in a company. The total of all assets appears on the company’s balance sheet, which is one of the most important financial statements that a UK company has to deliver to Companies House every year. The opposite of an asset is a liability. All the liabilities of a company are summed up and deducted from the total assets to arrive at the company’s net worth.

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Assets fall into two categories: tangible assets and intangible assets and so total assets is the sum of total tangible assets and total intangible assets. The valuation of assets is a matter of open debate. The company may decide to use the book value of those assets, which is the price paid to acquire them, or to revalue the assets to the current market value. A company can manipulate its net worth by deciding which of these two systems best enhances the value of its assets.

Tangible assets

Tangible assets are the easiest to value. This category includes cash, plant and machinery, inventory and work in process. Unpaid invoices are also classed as an asset, called “accounts receivable.” This, together with goods that have been delivered but not yet invoiced, forms a category of asset called “accrued revenue.”

Fixed assets

Items such as machinery, cars and furniture are called fixed assets. They have to be replaced periodically and so the accountant will write off a portion of their cost of acquisition over a set length of time. This is called asset depreciation; these items are expected to be replaced once the depreciation period has written off all the cost of buying those items. Companies in financial difficulty can adjust the length of time they expect to use their fixed assets to reduce the cost per year and thus increase the value of their assets.

Intangible assets

Intangible assets are difficult to value; investors need to drill down from the total assets figure to examine their value. Goodwill, brands, copyrights, patents and mailing lists are all types of intangible assets. They are not suitable collateral for loans, but companies can list them on their balance sheet, thus inflating their total assets and boosting the perceived value of the company.

Caution

Total assets can be misleading. It is important to examine the components of the total assets figure to work out what basis of valuation the accountants used to give the value of each element. The value of total assets can be influenced by intangible items, such as trademarks, whose value may be aspirational rather than real. Companies can go bankrupt even when they show a large amount of total assets because that figure may derive from unpaid invoices or unrealistic valuations of fixed assets and intangibles. The actual physical cash figure in the total assets components is the most important element. Sometimes lack of cash is what causes viable businesses to fail.

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