FAQ: What Is the Correct Order of Assets?
By Indeed Editorial Team
Published August 4, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Listing your company's assets in the correct order can be important so you have an accurate balance sheet. Order of assets helps both companies and investors define asset liquidity, current liability coverage and financial stability. Understanding the correct order of assets for your balance sheet can help you accurately report the financial status of your business. In this article, we discuss the order of assets listed on a balance sheet, the importance of liquidity and the difference between the order of assets and liquidity.
What are the assets on a balance sheet?
Assets on a balance sheet are cash or other items that the business owns. These may also include assets that the business converts to cash during the business cycle, such as investments or materials. For example, a business uses available cash to purchase materials, which it later turns into products and sells to customers. After selling the products, the business receives more cash back than it used to create the products. This cash-to-cash conversion process is the operating cycle or business course. Corporations may complete anywhere from one to several business cycles in a year.
The current assets that corporations list on a balance sheet only include those the company can convert into cash during normal business activities. Assets typically on a balance sheet include:
Cash is the business's money either in company circulation or in corporate banks. Current assets exclude cash held for situations such as retirement, bonds or pre-paid investments. Balance sheets always list cash first, as it's the asset most readily available.
Marketable securities are temporary investments made from a business's excess funds. Because businesses don't need excess funds to conduct daily operations, corporations invest in marketable securities that produce returns. Some of these may include investing funds in the stock market, expanding the business, creating marketing campaigns or collaborating with other companies.
Accounts receivables are any payments a business has not yet received for its services. They commonly comprise customer payments such as credit or checks, which exist on the balance sheet through promissory notes. Businesses document any currently collectible billed amounts as current assets.
Inventories are sellable goods, partially completed products and material resources. Accounting records accumulate the costs of purchasing materials and manufacturing products. The inventories category in a balance sheet also identifies both the costs of sold goods and inventories during the entire fiscal period.
Prepaid expenses include any future company payments for goods and services. Balance sheets don't convert them into current assets to help avoid penalizing companies that pay operating costs in advance. Payments such as insurance premiums and rental fees exist in this category.
Investments are cash funds or security payments that businesses hold for either a designated purpose or extended period. They may include stocks, bonds, real estate and mortgages. Businesses may also use investments as pension funds.
Plant assets, or fixed assets, are land, buildings, machinery or other equipment businesses use during daily operations. Most corporations don't sell these assets to convert them into cash. Plant assets produce income through operational use.
Intangible assets include valuable rights, advantages, relationships and privileges. Although intangible assets lack a physical form or company space, they still add value to a business. Some examples of intangible assets could include a right to access a property, a relationship with a sister company or an advantage in a particular market.
Other assets comprise any credits that don't exist in any other asset group. They may be cash advances for company employees or life insurance payments. Construction and expansion projects are also considered other assets.
Current liabilities are obligations a company completes within the current business cycle or the next year. When businesses gain current assets, such as inventory, they create liability payments and write the amounts owed to creditors. Liabilities may include estimated payable income taxes, various wages, employee salaries and property tax.
Business owners classify debts with deadlines beyond a year as long-term liabilities. Examples of long-term liabilities include bonds, notes and mortgages. If you have a portion of a loan due in under a year, classify it as a current liability.
Related: Balance Sheet: Template and Example
Customers may make payments in advance for services or goods. Customer obligations rely on product delivery rather than cash payment. Business owners define any advance collections with unfinished customer obligations as deferred revenues on their balance sheets.
Balance sheets divide owner's equity into two portions. One portion represents amounts invested, while another portion shows the amounts retained in net worth. Balance sheets divide the owner's equity because of the corporation's stockholding. Typically, stockholders aren't responsible for company debt, but they could still lose their investments. The company debt also doesn't affect personal assets.
Cost is the agreement between the customer and the seller. Typically, assets represent the price arrangement between two parties. On a balance sheet, business owners monitor the current outstanding costs for goods and services to set costs.
What is the correct order of assets on a balance sheet?
On a balance sheet, the correct order of assets is from highest liquidity to lowest. Because cash assets convert easily, cash is first on the list. The least liquefied balance sheet assets are investments. The correct order of assets on a balance sheet is:
Short- and long-term assets
What is the importance of liquidity?
Liquidity is important because it helps businesses measure their average cash generation. It helps show business owners how much money stakeholders make based on company dividends. Measuring liquidity using a balance sheet helps stakeholders understand and decide on their relationship with the company. Liquidity order listings may also show stakeholders' company tendencies concerning liabilities, repayment capacities, cash flow and loan installments.
What's the difference between the order of assets and the order of liquidity?
Businesses use liquidity ratios, or order of liquidity, to calculate the order of assets on a balance sheet. Because the order of assets begins with the most liquid asset to the least, businesses calculate the liquidity of each asset. Liquidity ratios help evaluate the health of a business based on its ability to handle debt. There are two ways to calculate the liquidity of an asset, including:
The current ratio divides current assets by current liabilities. Businesses include both amounts on a business's balance sheet. Current assets include cash, marketable securities, inventory and accounts receivables. Current liabilities include the totals from debts or interests in the next year. For example, if current assets total to $800,000 and total liabilities total to $400,000, the current ratio is 2:1.
A quick ratio is a current ratio minus all inventory balances. The quick ratio evaluates liquidity thoroughly by not including inventory. Companies usually try to avoid using inventory to pay the outstanding debt in order to maintain an accurate count of their merchandise.
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