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Hi, need to submit a 500 words paper on the topic Finance Concepts. Personal Finance Concepts A company's asset is defined as anything it owns that has the potential to produce future economic benefit
Hi, need to submit a 500 words paper on the topic Finance Concepts. Personal Finance Concepts A company's asset is defined as anything it owns that has the potential to produce future economic benefit. Assets can either be in company's possession or the company has right to take possession of ("Assets," 2005). Asset accounts may include current assets and fixed assets. Current assets comprise of liquid assets such as cash, marketable securities, receivables and inventories. On the other hand, fixed assets include property, plant and equipment intended to be used for the operations of the company. Intangible assets, which include patents, trademarks and reputation among others, may also be lumped as an asset account. (Brealey, Myers & Marcus, 1995)
As part of a team meeting, this paper evaluates which transactions listed below would have an escalation effect on total assets.
Transactions:
1. A company receives a cash investment from the owner.
2. A company makes a cash purchase for a building site
3. A company pays cash on accounts payable.
4. A company purchases machinery for a plant and signs a promissory note in payment.
5. A company's owner withdraws cash from the business for personal use.
6. A company receives cash from a customer on account receivable.
7. A company sells land for an amount equal to the cost of the land in a cash transaction.
8. A company borrows money from a bank.
Based on the list above, the transactions which would result in an increase in the total assets of a business are as follows:
Transaction #1 - A company receives a cash investment from the owner.
When a company receives an additional infusion of cash from the owner, the total asset specifically the asset account is increased. This is accompanied by a corresponding augmentation in the stockholders' or owners' equity.
Transaction #4 - A company purchases machinery for a plant and signs a promissory note in payment.
This transaction will result in the increase in total assets due to the increase in the property, plant and equipment (PP&E) account. In this regard, the company's liability will also increase due to the issuance of the promissory note which is tantamount to a promise to pay specified amount at the stipulated terms (Meigs & Meigs, 1986).
Transaction #8 - A company borrows money from a bank.
Similar to the initial transaction, the company's total assets particularly the asset account increases as it receives the money loaned from the bank. With this transaction, the company's total liability also increases since an obligation to pay the bank loan arises.
Note that the other transactions do not result in an increase in total assets due to the reasons summarized as follows:
When a company makes cash purchase for a building, there is no movement in total assets because amount in cash account is just transferred to another asset account which is building or PP&E account.
When a company pays cash on accounts payable, total assets particularly the cash account decreases because there is an outflow of cash used to settle accounts payable.
Similarly, when a company's owner withdraws cash from the business for personal use, cash account, which is an asset account, decreases because cash is used to pay for owner's personal expenses.
When a company receives cash from a customer on account receivable, there is no movement in total assets because only asset accounts, i.e. cash and accounts receivable, are equally debited and credited, respectively.
In the same way, when a company sells land for an amount equal to the cost of land in a cash transaction, there is no change in total assets because increase in cash account is just equally offset by decrease in asset account for land or PP&E.
Reference
"Assets". Wikipedia. (2005). Retrieved August 18, 2005, from http://en.wikipedia.org/wiki/assets
Brealey, R.A., Myers, S.C., & Marcus, A.J. (1995). Fundamentals of Corporate Finance. Mc-Graw Hill Inc.
Meigs, W.B. & Meigs, R.F. (1986). Financial Accounting. Mc-Graw Hill Companies.
