Personal Finance

Know your financial assets

Assets are cash and any other property you have with monetary value. In the context of accounting, assets are mainly classified into two types – current and fixed assets. Current assets are those assets which can be consumed within one year. Current assets include cash, accounts receivable and inventory. Fixed assets are those assets which are expected to keep on providing benefit for more than one year. Fixed assets include equipment, buildings, and real estate.

Financial assets are those assets which derive its value due to a contractual claim. That is financial assets comprises of cash or any other monetary assets and receivables which are held by the Federal Government. Unlike tangible, physical assets, such as land and property, financial assets do not necessarily have physical worth. Some examples of financial assets are cash balances, direct loans, bonds, stocks, guaranteed loans acquired after default, bank deposits, and accounts receivable.

Financial assets, as said above, comprises of cash and other monetary assets which can be changed into cash within one year or less time in most cases (that is a short period of time). In most cases financial assets are calculated when financial statements are prepared – as of the balance sheet date. Financial assets are usually calculated with the same rate of their current cash value. That is, what will be value of these assets if we would convert them in to cash now.

Lets us look in detail about the following financial assets:

  • Cash
  • Cash Equivalents
  • Short Term Investments
  • Accounts Receivable

Cash and Cash Equivalents

Cash, as the word indicates, include cash money such as paper and coins, money orders and checks to be deposited, currency deposited in your bank accounts which can be obtained easily. The term liquid cash refers to those cash which can be liquidated or turned into cash immediately.

Cash Equivalents refers to those short term investments which can be liquidated into cash easily. Some examples of cash equivalents include high grade commercial paper, US Treasury bills, and money market accounts. Commercial papers are usually sold by corporations, when they are in need of money for a very small period of time. Commercial papers come due in a short period of time, usually some months, and pay a higher interest rate than ordinary investments.

Short Term Investments

Short term investments consist of bonds and stocks which the company intends to bear only for a small period of time, and then sell and transfer to cash. It is a good idea to convert unnecessary cash into an investment account, where it can show capital benefits, dividends or gain interest. These investments are calculated at their current market value on the balance sheet, even though it is greater than the price that had paid for the investments. Short term investments are one of those few items that we usually include in a balance sheet at a higher rate than its original cost.

Accounts Receivable

It is a common seen in today’s market that companies sell products and services to its customers on credit. Accounts Receivable (AR) is the amount a customer owe to the company. Accounts Receivable is recorded at the same time a customer make a sale. The amount is recorded only after deducting any cash paid by the customer at the time of purchase. When a customer makes a payment, the payment is subtracted from the accounts receivable balance.

The Accounts Receivable Subsidiary Ledger used by most companies is same as the General Ledger. Detailed information about each customer’s account will be entered in the subsidiary ledger. That is, the ledger contains details of purchases, returns, payments, and adjustments made by the customers. All major companies will send accounts receivable statements customers at the end of each month. The statement lists the details of the monthly transactions of the customer together with the ending balance due from the customer.