Balance Sheet Accounting – How to Understand Balance Sheet Accounting

Balance sheet accounting is accounting when you have fixed assets. An important distinction that you need to make is the difference between current assets in accounting and fixed assets in accounting. Current assets are the assets that form the circulating capital within a business. These are either replaced on a frequent basis or they are converted into currency through the course of trading. Some of the more common examples of current assets include cash, trade debtors and stocks. Current assets and fixed assets are different from one another when it comes to accounting on a balance sheet.

Fixed assets in balance sheet accounting are assets related to a business that are specifically intended for continued use instead of short term or temporary assets like stocks. These assets absolutely have to be reclassified in the balance sheet for the company as being tangible assets, intangible assets or as investment. Some examples of assets that are intangible would include patents, goodwill and trademarks. On the other hand, some examples of fixed assets that are tangible include buildings, land, machinery, fittings and fixtures, IT equipment and motor vehicles for example. It is important to consider how a business should reflect a FA changing value in the company's accounts.

Consider that the benefits a business will obtain from FA are going to extend over a period of several years. A company may, for example, use the same production machinery equipment over a period of several years. A vehicle owned by a salesman may have a shorter useful life on the other hand. When you accept that the life in a FA is going to be limited, then the balance sheet accounting accounts of your business are going to need to recognize that the benefits of this FA are actually consumed over a period of time that may cross several months or years.

When a FA is consumed over a period of time, this is known as depreciation. In balance sheet accounting, depreciation is the using up, wearing out or otherwise reducing the useful life of a tangible and fixed asset. A portion of these benefits associated with the FA are going to be used up or otherwise consumed during the accounting period of the asset's life so that new revenue can be generated. In order to actually calculate a profit for any period, expenses must be matched with the revenues that those expenses help to earn. For more information on investing in investment opportunities usually or normally not found in the marketplace, click here!

Source by Sean L Johnson

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