Assets: Definition and Classification

Assets: Definition and Classification

Definition of assets
--> Assets represent future economic benefits.
--> Future benefits should be probable.
--> Past transactions created future benefits.
--> Future benefits are controlled by an entity.

Assets: Classification

1. Current assets and noncurrent assets
--> current assets will be converted into cash within one year
--> noncurrent assets will be converted into cash after one year

[Example]
On March 1, 2011, Entity A loaned $100,000 to Entity B. The loan is due on September 1, 2012.
Is this a current or noncurrent asset on the Statement of Financial Positions as of December 31, 2011?
--> Since the loan is due within a year from December 31, 2011, it is reported as a current asset.

2. Cash and receivables
--> Cash is a financial asset.
--> Receivables include accounts receivable and notes receivable.

[Example]
On April 1, 2011, Entity A sold 200 units of product to Entity B at $10 per unit on credit.
April 20, 2011, Entity B paid $2,000 to Entity A.
Prepare journal entries for these transactions.

April 1, 2011
To record the sale of products on credit

debit credit Accounts receivable 2,000         Sales   2,000 April 20, 2011 To record the collection of accounts receivable

debit credit Cash 2,000         Accounts receivable   2,000 3. Inventories and prepaid expenses Inventories include: --> merchandise --> raw materials --> work in process --> finished goods Prepaid expenses include: --> prepaid rent --> prepaid insurance Prepaid expenses are assets, because the entity will receive economic benefits from the amount of expenses paid in advance. [Example] On November 1, 2011, Entity A paid $60,000 cash as a rent for six months from November 1, 2011 to April 30, 2012. Prepare journal entries for these transactions. November 1, 2011 To record prepaid rent expense

debit credit Prepaid rent 60,000         Cash   60,000 December 31, 2011 To record rent expense for the period from November 1 to December 31, 2011

debit credit Rent expense 20,000         Prepaid rent   20,000 April 30, 2010 To record rent expense for the period from January 1 to April 30, 2012

	debit	credit
Rent expense	40,000
Prepaid rent		40,000

4. Investments in debt and equity securities
--> Trading securities
--> Available for sale securities
--> Held to maturity securities

5. Property, plant and equipment
--> Land
--> Buildings
--> Machinery
--> Equipment

6. Intangible assets
--> Intangible assets do not have physical substance
--> Patents
--> Trademarks
--> Copyright
--> Goodwill