A Guide on How to Calculate Total Assets (With Examples)
Updated September 30, 2022
A business' total resources refer to the properties or items that it can exchange for money. Calculating these assets is essential to determining the business's financial health. Understanding how to calculate a business' total resources can help you understand a company's value and make better financial decisions. In this article, we discuss total assets, outline types of current and long-term assets, explore how to calculate total resources, review how to calculate a business' return on assets, and provide some examples.
What are total assets?
Total assets represent the total value of a person's properties and resources after considering all liabilities and equity. Assets are all resources an organization or individual owns, such as a share or car. Organizations and individuals purchase assets because their values have the potential to appreciate in the future. For example, an organization may purchase assets such as real estate or equipment to use them to increase its cash flow. You consider two major categories when calculating the company's assets, namely current assets and long-term assets. Current assets refer to cash assets or assets the company can convert into cash.
Companies or individuals purchase current assets intending to exhaust or sell them within a year or finance short-term expenses or daily operations. Long-term assets refer to resources the owner intends to keep for longer periods or require more time to liquidate. In contrast, a liability represents an obligation that an organization or individual owes to somebody else or other organizations. These obligations may be financial or service and may include taxes, rent, or debt. Considering the liabilities helps you derive a more accurate calculation when determining the total resources.
Types of current assets
Some types of current assets include:
Cash and cash equivalents: Cash or its equivalents include all liquid assets that the owner can access immediately. You can use these assets to repay debts, purchase new resources, and pay out dividends to investors.
Accounts receivable: Accounts receivable refers to credit debts that a business expects from its customers. For instance, if a business allows customers to purchase products or services on credit, they may agree to some terms, including additional interest and how long they can take before repaying.
Temporary investments: Temporary investments refer to short-term investments. Businesses or individuals make these investments intending to convert them to cash within the fiscal year.
Inventories: Inventory includes merchandise and finished goods that a business intends to sell. These goods include raw materials for processing, finished goods produced by the company, and those purchased from suppliers.
Certificates of deposit: Certificates of deposit, also known as time deposits, are similar to savings accounts because the initial deposit has the same value as cash. Although certificates of deposits accrue interest and attract a penalty if withdrawn before their due date, you can purchase them in different time increments, such as six months, one year, and five years.
Capital stock (or stockholder's equity): Capital stock refers to the stock in the company which the company can sell for investment capital. A company can sell some capital stock to raise immediate cash, but it's essential that it doesn't sell more than the portion allowed by its corporate charter unless the value of its stock becomes diluted.
Types of long-term assets
Here are some examples of long-term assets:
Fixed assets: These are resources that the company uses to produce goods and services or uses for more than a year before converting them to cash. Examples of fixed assets include equipment, land, furniture, buildings, and company-owned vehicles.
Intangible assets: These assets don't have any physical presence but possess economic value. Examples of intangible assets include licenses, trademarks, patents, copyrights, and other intellectual property that the company can use to generate revenue in the future.
Goodwill: Goodwill is also a form of an intangible asset. Businesses can build goodwill by purchasing an entity for more than the asking price and not recording the price they pay in their assets and liabilities.
Accounts receivable: These credit debts can also qualify as long-term assets. They qualify as long-term assets when customers take more than a year to repay their debts.
How to calculate total assets
Here's a step-by-step guide to help you calculate a company's total resources:
1. Determine equity
Equities in this sense refer to assets. You can determine the company's equities by calculating the sum of all its resources that it can sell for cash in the future. These resources include current assets, such as inventory, accounts receivable, and stocks. They also include long-term assets, such as goodwill, property, and intangible assets.
2. Determine the total the liabilities
Calculate the value of the company's total liabilities, including its outstanding and ongoing costs. Liabilities also include other expenses, such as utility costs, rent, and bank debts. You can also include money owed to suppliers, accounts payable, and salaries owed to employees.
3. Combine the equity and liabilities
Derive the value of the company's total resources by combining the liabilities and equity. As liabilities have a negative value, the easiest method of calculating the total resources is by subtracting the value of the liabilities from the value of the assets or equity. The resulting value equals the company's total resources.
How to calculate return on assets for a business
The return on assets compares the company's net income with its total resources. Follow these steps to calculate a company's return on assets:
1. Determine the net income
Calculate the company's net income, which typically includes its total profits less any business expenses. You can derive the value of the company's net income by looking at the bottom part of its income statement or subtracting the business's expenses from its total profits. For instance, suppose the company's total profits are $800,000, and its total business expenses are $375,000. In that case, its net income is:
$800,000 - $375,000 =$425,000.
2. Calculate the value of its total resources
Determine the value of the company's total resources by subtracting the value of its total liabilities from its assets or equities. Following the previous example, the company has a net income of $425,000. It also has liabilities and expenses worth $250,000 and assets worth $1,000,000. In that case, the value of its total resources is:
$1,000,000 - $250,000 = $750,000.
3. Divide the company's net income by its total resources to derive the return on assets
Dividing the company's net income by its total resources gives you its return on assets. Following the example above, you can mathematically represent the calculation using the formula:
Return on assets = Net income ÷ Total assets.
$425,000 ÷ $750,000 = 0.5567.
4. Multiply the result by 100 to derive the percentage value of the return on assets
Calculate the percentage value of the return on assets by multiplying the original return on assets value by 100. Return on assets calculations typically presents the value as a decimal figure which may be difficult to understand. Converting the value to a percentage figure makes it easier to read and interpret. Following the above example, the value of the company's return on assets is 0.5667. The percentage value is:
0.5567 x 100 = 56.67%
This implies that the company has a high return on assets.
Examples of calculating total resources
Here are some examples of calculating total resources to guide you:
Example calculating for a small publishing firm
Suppose you're an accountant for a small publishing firm that runs out of an office. The firm pays $2,000 per month for its office space and utility costs of $200 each month. At the end of the year, the company's value is $30,000, and it has $8,000 in inventory.
To find the value of its total resources, first, sum the value of all its assets:
($30,000 + $8,000) = $38,000
Then, find the total value of its liabilities, which includes rent and utilities for the year:
(($2,000 x 12) + ($200 x 12)) = $26,400
The value of the company's total resources is:
($38,000 - $26,400) = $11,600
Example calculating for an individual
Suppose John owns two houses. The value of the first is $200,000, and the value of the other is $350,000. He also has a car worth $32,000. In addition, John pays $350 per month as utility costs for one of the houses and has an outstanding $45,000 in student loan debts. He also has a savings account containing $6,000 and $3,000 in stocks. To calculate John's total resources, first derive the value of his equities, which include a car, two houses, a savings account and stocks. The total is:
($32,000 + $200,000 + $350,000 + $6,000 + $3,000) = $591,000
Next, calculate his total liabilities, which include student loans and utility costs. The total is:
(($350 x 12) + $45,000) = $49,200
Therefore, the value of John's total resources is:
($591,000 - $49,200) = $541,800.
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