Definition of Asset Account
Asset Account can be defined 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 which are expected 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 that represent the amount of resources owned and controlled by an organization presented in order as specified by applicable GAAP. Assets include resources that a company owns or that are acquired through a transaction having the capability of generating future economic benefits for the organization i.e. leading to an increase in profits and wealth. Usually cost incurred in acquiring assets are charged as expense depending upon its revenue generating capacity. For example, if it is expected to last for one accounting period, it is charged off as an expense in the same year whereas if it is expected to last for more than one accounting period, it will be charged off in expenses over multiple period. Asset accounts are real account 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 account.
Examples of Asset Accounts
Some common examples of asset accounts are as follows –
- Cash: All the coins, currency, cash, etc. A separate general ledger account is prepared by the company for each checking account, cash fund, etc but are combined and the total is reported as cash equivalent on the balance sheet.
- Short Term Investments: These are the 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 on delivering of goods and services on a credit and is debited at the time of credit sales and credited with the realization proceedings.
- Prepaid Expenses: These are expenses which paid in advance i.e. services are yet to be received. Where the amount appear 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: This includes the cost of goods that have been manufactured or purchased but not yet sold.
- Supplies: Miscellaneous assets that are too small and inexpensive to capitalize manufactured in the production of a good are included as supplies.
- Long Term Investments: It includes 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 noting 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 nomenclature of account, date of entries, 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 machinery of same class $1,00,000
- Annual Depreciation for machineries 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 accounts, 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 are 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. It may happen that one asset may be converted in other form. To record such transactions, accounting debit is given to increased asset with a corresponding credit to reducing assets.
Asset Account in Double Entry Book keeping
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 account and vice-versa. A general ledger represents records of both sides of each transaction. Whenever a company sells a product the revenue it earns increases thereby increase in cash by an equal amount whereas if a company borrows the fund from a lender the cash balance increases, and the liability of the company also increases by the same amount. Asper the accounting equation, assets will always be equal to the 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 forms the most crucial part of the balance sheet which is been looked upon by various stakeholders. It is their responsibility of management to maintain the proper assets A/c and report to all concerned. Assets A/cs depict what the business owns. It also help in a better understanding of the financial positions of the organization. Many times companies indulge in window dressing practices to increase its asset worth with different motives. An auditor should check and ensure the accuracy of Assets A/c.
This is a guide to Asset Account. 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 –