Updated July 15, 2023
Definition of Asset Account
Asset Account can define as a part of general ledger books of accounts maintained by an enterprise that records, reports, and presents the amount of economic resources owned, managed, and controlled by it either in the form of capital assets that expect to provide economic benefits for more than one accounting period or short term period, listing all the related transactions and usually having a debit balance.
Asset accounts are the general ledger accounts representing the amount of resources owned and controlled by an organization present in order as specified by applicable GAAP. Assets include resources that a company owns or acquires through a transaction that can generate future economic benefits for the organization, i.e., increasing profits and wealth. Usually, costs incurred in acquiring assets are charged as expenses depending upon its revenue generating capacity. For example, if it is expected to last for one accounting period, it is set as an expense in the same year. In contrast, if it expects to last for more than one accounting period, it will charge off in expenses over multiple periods. Asset accounts are real accounts having a debit balance that increases with the debit entry and decreases with a credit entry. Asset accounts are also referred to as called as permanent accounts.
Examples of Asset Accounts
Some common examples of asset accounts are as follows –
- Cash: All the coins, currency, cash, etc. The company prepares a separate general ledger account for each checking account, cash fund, etc., but it is combined, and the total report is cash equivalent on the balance sheet.
- Short Term Investments: These are temporary investment that includes bonds, promissory notes, certificate of deposit, etc., that matures in less than one year. It also includes stocks of another incorporation if they can be easily sold on the stock exchange.
- Accounts Receivable: It is a right to receive an amount for delivering goods and services on credit. It is debited during credit sales and credited with the realization proceedings.
- Prepaid Expenses: These are expenses paid in advance, i.e., services are yet to be received. The amount appears as assets until the cost is completely used up or expires. For example, payment made for the insurance of a car. The amount is the unexpired amount and should be reported in the asset account.
- Inventory includes the cost of goods manufactured or purchased but not yet sold.
- Supplies: Miscellaneous assets that are too small and inexpensive to capitalize manufactured in producing a good are included as supplies.
- Long Term Investments: These include real estate, money restricted for a building project, bonds payable, preferred stocks, or investments in common stocks reported in the balance sheet where the holding period last for more than 12 months.
Asset Account Format
Asset Account format is nothing different from any usual accounts. All books of accounts are prepared in one T shape format. Every increase in an asset account is depicted via debit entry, whereas reduction is depicted via credit entry. All relevant information is mentioned within each asset account, like the nomenclature of the account, date of access, opening balance, closing balances, etc. Let’s understand with the help of a practical example as follows:
Prepare Asset Account depicting below transactions: –
- On 01/01/2019, Mark Inc. purchased machinery for production worth $2,00,000 in cash.
- On 01/01/2019, Mark paid one-time installation charges of $20,000 in cash
- On 01/07/2019, Further purchased another piece of machinery of the same class for $1,00,000
- Annual Depreciation for machinery is $40,000on 31/12/2019
M/s. Marc Inc.
|1/1/2019||To Cash A/c||2,00,000||31-12-2019||By Depreciation A/c||40,000|
|1/1/2019||To cash A/c||20,000|
|30-12-2019||By Balance c/d||2,80,000|
|1/7/2019||To Cash A/c||1,00,000||(Balancing Fig.)|
Asset Account Debit or Credit
Assets include the resources of a company like debtors, stock, plant and machinery, furniture and fixtures, land and building, and other accounts under various heads of balance sheet Thumb rule in line with the real account, which states that:
- Debit the Increase
- Credit the Decrease
Accordingly, for each asset account, debits represent increases in an asset account, whereas credits are reductions in an asset account. In a ledger account, the rise in assets is classified as debits, and a fall in the asset is classified as credits. The entry for debit is recorded on the left side of the accounting ledger, and credit is recorded on the right side. One asset may be converted in another form. To record such transactions, accounting debit is given to increased assets with a corresponding credit to reducing assets.
Asset Account in Double Entry Bookkeeping
Double entry refers to the concept of accounting, which states that every accounting transaction will affect at least two accounts. A debit will make equivalent simultaneous credit in one or more accounts and vice-versa. A general ledger represents records of both sides of each transaction. Whenever a company sells a product, its revenue increases, increasing cash by an equal amount. However, if a company borrows the fund from a lender, the cash balance increases and the company’s liability also increases by the same amount. In the accounting equation, assets will always equal liabilities plus equity to maintain a balance sheet in double-entry bookkeeping. Mentioned below journal entry will help in better understanding:-
- Inc purchased the building on the credit of $20,000.
|xxx||Building A/c Dr.||–||20,000|
|To Creditor for Building A/c||20,000|
|(Being building purchased on credit)|
Here, an asset A/c – building A/c is increased with debit, and as a principle of double entry, liability -Creditors for building A/c increased.
- Inc applied depreciation on building $2,000
|xxx||Depreciation A/c Dr.||–||2,000|
|To Building A/c||2,000|
|(Being depreciation charged)|
Here, asset account reduction is given effect by crediting building A/c and simultaneously giving debit to expense A/c- depreciation.
Asset accounts form the most crucial part of the balance sheet, which is being looked upon by various stakeholders. Management’s responsibility is to maintain the proper assets A/c and report to all concerned. Assets A/cs depict what the business owns. It also helps in a better understanding of the financial positions of the organization. Companies often use window dressing practices to increase their asset worth with different motives. An auditor should check and ensure the accuracy of Assets A/c.
This is a guide to Asset Accounts. Here we also discuss the definition and asset account in double entry bookkeeping, along with examples. You may also have a look at the following articles to learn more –