When an Asset is Not an Asset

When is an asset not an asset? Let’s start out with some basics before we get into the meat of this article.

Asset Defined

According to Merriamwebster.com one of the definitions of an asset is an item of value owned or item(s) on a balance sheet showing the book value of property owned. For accounting purposes this is a good working definition. It would include such things as cash, receivables, inventory, land and building, equipment, and pre-paid expenses. There are other things that can be classified as an asset, but this list does not need to be all inclusive for the purpose of this blog.

How Are Assets Used?

Assets are used to produce income in two main ways. One, they can be sold and two they can be used in the operation of the business. Again, these are the main ways and not all inclusive. An example of the first way of using an asset is to sell inventory to convert it to another asset like receivables and/or cash. The idea is that cash is the most readily usable asset, and to generate cash other assets (like inventory and receivables) are converted to cash. An example of using an asset in the business is the use of fixed assets (like buildings and equipment) to conduct activity that will eventually lead to more cash. These two ways of using assets are typically combined, with an example being a company that processes inventory using equipment to produce or distribute a product. Here is a basic diagram of the assets on a balance sheet using sample numbers. Those listed as current are expected to be used within a year. The non-current assets will take longer than a year to use.

assets-example

When as Asset is Not an Asset

In the above example we can use a hypothetical scenario. Let’s assume that the $200,000 in Buildings consist of a distribution center valued at $150,000 that is being used to store and ship products to customers and another building valued at $50,000 that the company has owned for several years. This second building is not even rented to another company, but just sits empty and idle.

Although from a technical accounting standpoint this second $50,000 building is still classified as an asset, from a practical perspective it functions more like a liability. Here is what I mean by that:

  • If it is not fully depreciated then each month depreciation expense will reduce profit
  • It probably is insured so there is a monthly insurance expense
  • Even if not used there will likely be periodic repairs and maintenance expenses
  • If it has a mortgage on it then there will be a monthly reduction of profit for interest expense and cash will be used to pay the mortgage

These are just some of the items that will impact the company from an asset that is not being used. Since it is not being used in any fashion by the company, from a functional perspective it is a liability that reduces profit and cash.

What’s the Point?

Simply put, if your company has assets that it is not using and sees little prospect of doing so, it would be worth pursuing selling the asset to provide cash, increase profit, and reduce liabilities and expenses.

Take a careful look at your company. Do you have assets that are not being put to use? This can be not just buildings but equipment or inventory. It is better to dispose of assets that are not used while they still have value to someone.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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