Calculating total assets is a very simple accounting calculation that helps identify the financial position of a company. The equation is made up of the company’s assets, liabilities and owner’s equity. The way that these factors relate with each other will provide an important figure that is included in many businesses’ balance sheets and income statements.
In this OneHowTo article we will show you how to calculate total assets in accounting.
Accounting Equation
The first thing you should know if you want to learn how to calculate total assets in accounting is that, according to the accounting equation, total assets must be equal to the sum of total liabilities and owner’s equity.
Total Assets = Total Liabilities + Owner’s Equity
This means that if a company has been reporting and recording transactions efficiently on the balance sheet, then both sides of the equation should be “in balance”. For instance, to buy machinery the company will have to spend cash. Something goes out and something comes in.
Total Assets
A company’s assets are essentially all the things that the company owns of value and could be converted into cash. This includes machinery, materials, rent, buildings, land, inventory, cash, accounts receivable, prepaid insurance, investments and goodwill. They are often referred to as the resources of a business.
Total assets can be divided into current assets and non-current assets. Current assets can be easily converted into cash within one year of the balance. Non current assets or long term assets may not be converted within one year.
The types and categories of assets will vary from company to company so make sure to refer to the company’s balance sheet. The assets would most probably be listed in terms of liquidity with the item more easily converted into cash first.
For more information on the subject you can visit our article: What are Passive and Active Assets in Accounting.
Total Liabilities
A company’s liabilities comprehend all the things that a company owes. This includes accounts payable, salaries and wages, interests, income taxes payable and loans payable. It is often referred to as a company's financial obligations or money that is leaving the business.
Total liabilities are broken down into current liabilities and non-current liabilities. Current liabilities must be repaid within one year of the balance. Non current liabilities or long term liabilities aren’t due for over a year.
Owner's Equity
When the liabilities are subtracted from the assets we have left over owner’s equity.
Owner’s equity = Assets – Liabilities
Included in owner’s equity is the investment by the owners or shareholders of the company; as well as, the net income accumulated that hasn’t been distributed to owners.
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