Accountancy · Ch 1 — Introduction to Accounting
Assets
Assets
Assets are the economic resources of a business — things it owns or controls that can be measured in money and that help it earn revenue. The textbook gives the example of Super Bazaar’s fleet of trucks: those trucks are used to deliver foodstuffs, so they provide economic benefit to the enterprise. Every asset appears on the asset side of the balance sheet.
An asset must be (i) an economic resource, (ii) owned or controlled by the business, and (iii) expressible in monetary terms.
Assets are broadly classified into two types: Current Assets and Non-current Assets.
Current Assets
These are assets that are either:
- held for sale or use in the normal operating cycle (usually one year), or
- expected to be converted into cash within one year from the balance sheet date.
Examples include cash in hand, cash at bank, debtors (accounts receivable), bills receivable, stock (inventory), prepaid expenses, and short-term investments.
Non-current Assets
These are assets that are held for long-term use in the business — they are not meant for sale in the ordinary course of business. They help the business generate revenue over several years.
Non-current assets are further divided into:
- Tangible Assets: Assets that have a physical existence — land, building, plant, machinery, furniture, vehicles, etc.
- Intangible Assets: Assets that do not have a physical form but still have value — goodwill, patents, trademarks, copyrights, computer software, etc.
The classification into current and non-current is based on the operating cycle of the business. For most businesses, the operating cycle is one year, but it can be longer for some (e.g., a winery or a shipbuilder).
Accounting Treatment
When an asset is purchased, the asset account is debited (because the business receives a benefit in the form of the asset) and the cash/bank account is credited (because cash goes out). For example, if Super Bazaar buys a truck for ₹5,00,000 by cheque:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Truck A/c Dr. | 5,00,000 | |||
| To Bank A/c | 5,00,000 | |||
| (Being truck purchased for business use) |
When an asset is sold, the cash/bank account is debited (cash comes in) and the asset account is credited (the asset leaves the business). Any profit or loss on sale is transferred to the Profit & Loss Account. …