Business assets are essential to the way most businesses function. But getting your head around the different types of assets and how they should be accounted for can be tricky. Let’s take a look at what you need to know.
What is a business asset exactly?
Business assets are things your business owns or leases that enable you to continue trading. They could be all sorts of things from cash, buildings, and stock, to office equipment and even brand reputation.
In accounting terms, business assets are resources that can be converted into ready cash, or used to generate value. Bank balances, inventory, prepaid expenses and accounts receivable are all good examples.
How do I categorise my business assets?
There are a couple of ways to go about grouping your business assets. The most common is to categorise them according to their type and nature.
Current assets: These are assets which you expect to use within the next 12 months. For instance, the stock that you sell to customers.
Fixed assets: These are assets which you expect to stay in use by the business for longer than 12 months. Equipment, property, and machinery are all common examples of fixed assets.
Another way of categorising your business assets is by their physical characteristics – that is, whether they are ‘tangible’ or ‘intangible’.
These have no physical “touchable” presence but still have value to the business, such as the brand recognition which helps drive your sales.
These are physical assets you can touch or measure, such as:
Business premises, property, or land.
Cash and cash equivalents.
Machinery and equipment.
The value of any confirmed orders.
Any unpaid invoices that your customers still owe to you.
How are tangible assets valuable to my business?
It would be extremely difficult, or even impossible, to run your business without your tangible assets. Although they are items that are not for sale to customers, they still represent a large amount of your company’s worth.
Your tangible business assets:
Allow you to provide goods or services to your customers, or otherwise meet the goals and objectives of your business. For instance, an accountant needs a computer to provide a service, and a cabinet maker needs tools to provide products.
Have a market value, and can be sold to raise extra cash in an emergency.
Can be used as collateral to guarantee a loan.
Do I need to record tangible assets?
So that you can make the most of your tangible business assets, you’ll need to track and manage them effectively. For accounting purposes, all fixed business assets should be recorded on your balance sheet.
Some assets decrease in value as time goes on. This change in value is measured using an accounting technique called depreciation, and reflected in your records.
Using an efficient asset and inventory management system will also help you track your assets in terms of their quantity, and condition. This is useful for protecting your business from risk of theft, damage, or loss, and help you insure the proper value of your assets.
Do shareholders and directors own the company’s assets?
This bit is particularly worth bearing in mind. As a sole trader you are your business, so own everything within it. It’s a bit different for limited companies. Company shareholders own the business – but they don’t own the assets that come with it.
Even if you’re the only shareholder, you don’t own your company’s assets. The company is its own separate entity, so ‘it’ owns the assets, not you.
What about assets I buy for my limited company?
If you buy any assets for your company using your own personal money (this often happens when a business is very new) then you need to transfer ownership of it to the company.
How do I know the value of an asset I’m transferring to my company?
If you do transfer assets to the company, you’ll need to be clear about exactly what the current market value is of the asset, bearing in mind its condition, age, and other factors.
Update your records once the transfer takes place, and keep any original receipts as supporting evidence.
What happens to assets if I decide to wind up my company?
This depends on how you close your limited company, and whether or not it’s still solvent (can afford to pay its bills). If the company is insolvent, then any assets are sold to pay off as many creditors as possible.
You can close a solvent company by either:
Having the company struck off at Companies House, known as dissolution. Assets that aren’t disposed of before applying for dissolution may then become property of the Crown. This is what’s referred to as ‘bona vacantia.’
Members’ Voluntary Liquidation (MVL). If you liquidate the company voluntarily, any assets left over once all the bills are paid are sold off for the benefit of the shareholders.
If you are thinking of buying back any assets from your business yourself, you’ll need to consider the tax implications.