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A business asset is an item of value owned by a company. Business assets span many categories. They can be physical, tangible goods, such as vehicles, real estate, computers, office furniture, and other fixtures, or intangible items, such as intellectual property. Business assets are itemized and valued on the balance sheet, which can be found in the company's annual report. They are listed at historical cost, rather than market value, and appear on the balance sheet as items of ownership. Most business assets can be written off (taken as an expense on the income statement) either as one large expense in the year of purchase, or by being depreciated, which is the process of spreading the cost of an asset over time. Some large, expensive assets may qualify to be expensed entirely in the year of purchase under section 179.
Assets are listed in order of liquidity, which is the ease in which they can be quickly bought or sold in the market without affecting their price.
Current Assets Vs. Non-Current Assets
Business assets are divided into two sections on the balance sheet: current assets and non-current assets. Current assets are business assets that will be turned into cash within one year, such as cash, marketable securities, inventory and receivables, debts owed to a company by its customers for goods or services that have been delivered or used but not yet paid for. These assets may only have value for a short while, but they are still treated as business assets.
Non-current assets, or long-term assets, on the other hand, are less liquid assets that are expected to provide value for more than one year. In other words, the company does not intend on selling or otherwise converting these assets in the current year. Non-current assets are generally referred to as capitalized assets since the cost is capitalized and expensed over the life of the asset in a process called depreciation. This includes items such as property, buildings, and equipment.
Depreciation and Amortization of Business Assets
Tangible or physical business assets are depreciated, while intangible business assets are amortized, the process of spreading the cost of an intangible asset over the course of its useful life. When businesses amortize and depreciate expenses, they help tie an asset's costs to the revenues it generates.
Depreciation is calculated by subtracting the asset's salvage value or resale value from its original cost. The difference between the cost of the asset and salvage value is divided by the useful life of the asset. If a truck has a useful life of 10 years, costs $100,000, and has a salvage value of $10,000, the depreciation expense is calculated as $100,000 minus $10,000 divided by 10, or $9,000 per year. In other words, instead of writing off the entire amount of the asset, capitalized business assets are only expensed by a fraction of the full cost each year.
Valuing Business Assets
The value of business assets vary and can change over time. Many current, tangible assets, such as vehicles, computers and machinery equipment tend to age and some may even become obsolete as newer, more efficient technologies are introduced.
Business investment refers to the commitment of funds to a business either in an active capacity or as a passive investor. An active investor would provide seed capital or startup capital, pre-IPO funds or franchising finance. However, most people seek business investment opportunities as passive investors, purchasing stocks and bonds. Business investment decisions require a risk-return tradeoff analysis. Business investment opportunities are largely contingent on the prospective rate of return or profit of a proposed business venture. The return on investment (ROI) is the ratio of money gained to the amount of funds invested. In case of passive investing (into shares and bonds), the ROI (or rate of return) includes a stream of income (dividends for shares and interest for bonds) as well as capital gains (appreciation in share or bond prices over time). The rate of return from a business investment is more than a function of the expected cash flows and capital appreciation. Since inflation erodes the value of money, it is important to consider the time value of money. The annual percentage return realized on an investment and adjusted for changes in prices on account of inflation or other external effects is known as the real rate of return. Do you know which investments are giving you the most bang for your buck? Taking a close look at what is actually helping your business grow and generate revenue. This can help you make wiser decisions that pay off for your company. Business investment specifically refers to accounting assets that are purchased in the hope of making money on their own, as opposed to something like a delivery car for a restaurant. The difference is that a delivery car will help make the business more profitable, but the restaurateur is unlikely to be paid back for the vehicle itself.
What Are the Types of Corporate Investment?
There are three main types of investment categories in accounting.
Ownership Investments: Referring largely to things like stocks, real estate, precious objects, and business investments, ownership investments refer to investments in which the buyer actually owns the asset. This is the most common type of investment. Accounting professionals can help to ensure that these investments are still producing income or appreciating.
Lending Investments: As a lending investor, you serve as a banker. You’re essentially buying debt in the hope and expectation that that debt will be repaid. Bonds, savings accounts, and Treasury inflation-protected securities (or TIPS) are all lending investments.
Cash Equivalents: These investments are “as good as cash.” It’s very simple to liquidate them, or convert them back to cash, if necessary. Money-market funds are cash equivalents.
A good portfolio should have a few of all three of these types of investments. While building a portfolio, an investor might also hear about mutual funds, which pool money from multiple investors together to make larger investments. An exchange-traded fund, or ETF, is similar to that concept but is traded like stock.
What Are the Best Business Investments?
In general, the best investments have these qualities:
Businesses with high returns on capital
Durable competitive advantages
Assets available for a good price that is likely to offer returns
The advisers and accountants at Ignite Spot can help you diversify your investment portfolio, assist you in getting started with investing, or teach you how to invest in a small business.
How Do Accountants Account for Investments?
The accounting experts at Ignite Spot handle three investment account types, and the balance sheets are accounted for in different ways depending on what kind of business investment account you used.
Held to Maturity: These are often lending investments with security held until a fixed date in the future.
Held for Trading: This type of investment is held in the hopes of future profit when it’s resold within a specific time frame.
Available for Sale: These are investments that can’t be held for trading or maturity.
he term collateral refers to an asset that a lender accepts as security for a loan. Collateral may take the form of real estate or other kinds of assets, depending on the purpose of the loan. The collateral acts as a form of protection for the lender. That is, if the borrower defaults on their loan payments, the lender can seize the collateral and sell it to recoup some or all of its losses. Before a lender issues you a loan, it wants to know that you have the ability to repay it. That's why many of them require some form of security. This security is called collateral which minimizes the risk for lenders. It helps to ensure that the borrower keeps up with their financial obligation. In the event that the borrower does default, the lender can seize the collateral and sell it, applying the money it gets to the unpaid portion of the loan. The lender can choose to pursue legal action against the borrower to recoup any balance remaining. As mentioned above, collateral can take many forms. It normally relates to the nature of the loan, so a mortgage is collateralized by the home, while the collateral for a car loan is the vehicle in question. Other nonspecific, personal loans can be collateralized by other assets. For instance, a secured credit card may be secured by a cash deposit for the same amount of the credit limit—$500 for a $500 credit limit.
Loans secured by collateral are typically available at substantially lower interest rates than unsecured loans. A lender's claim to a borrower's collateral is called a lien—a legal right or claim against an asset to satisfy a debt. The borrower has a compelling reason to repay the loan on time because if they default, they stand to lose their home or other assets pledged as collateral.
Types of Collateral
The nature of the collateral is often predetermined by the loan type. When you take out a mortgage, your home becomes the collateral. If you take out a car loan, then the car is the collateral for the loan. The types of collateral that lenders commonly accept include cars—only if they are paid off in full—bank savings deposits, and investment accounts. Retirement accounts are not usually accepted as collateral.
You also may use future paychecks as collateral for very short-term loans, and not just from payday lenders. Traditional banks offer such loans, usually for terms no longer than a couple of weeks. These short-term loans are an option in a genuine emergency, but even then, you should read the fine print carefully and compare rates.
Collateralized Business Loans
Another type of borrowing is the collateralized personal loan, in which the borrower offers an item of value as security for a loan. The value of the collateral must meet or exceed the amount being loaned. If you are considering a collateralized personal loan, your best choice for a lender is probably a financial institution that you already do business with, especially if your collateral is your savings account. If you already have a relationship with the bank, that bank would be more inclined to approve the loan, and you are more apt to get a decent rate for it.
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