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Total Assets: Definition & Explanation

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  • 0:00 What Are Total Assets?
  • 0:45 The Balance Sheet
  • 2:41 Example
  • 5:24 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Assets come in many different categories and classifications. In this lesson, we will take a look at total assets. You will learn not only what total assets are but also where a company must report them.

What Are Total Assets?

The basic accounting equation states that assets = liabilities + stockholders' equity. In the accounting industry, assets are defined as anything that a business owns, has value, and can be converted to cash. Assets are broken down into two main categories. These two categories are current assets and noncurrent assets. Each of these categories is further broken down into subcategories. Total assets are the sum of all current and noncurrent assets and must equal the sum of total liabilities and stockholders' equity combined.

The Balance Sheet

Let's look at the following balance sheet examples.

Notice on example A, assets are on the top of the balance sheet, and liabilities and stockholders' equity is on the bottom. On example B, assets are on the left side and liabilities and stockholders' equity are on the right. Regardless of whether the balance sheet is formatted with a top-to-bottom or side-to-side look, the premise is the same. The total assets calculation must be equal to the total liabilities and stockholders' equity calculation.

A second important concept to learn is the order in which total assets are reported on the balance sheet. Total assets are listed on the balance sheet in order of liquidity. Liquidity is a term used to refer to how quickly an asset can be turned into cash. The most liquid asset is cash. Cash is located at the very top of the balance sheet under the current assets classification. Cash is followed closely by accounts receivables, short-term investments, prepaid expenses, and inventory. Each of these items belongs to current assets.

The next section on the balance sheet is for noncurrent assets. Examples of noncurrent assets include real estate, machinery, and land. These noncurrent assets are also called plant, property, and equipment. Other things that are included as noncurrent assets are intangible assets, such as product trademarks and/or web domain names. As with any and all assets, and though deprecation and appreciation may occur, the valuation of each asset is recorded on the balance sheet as the assets purchase value. Once all assets have been classified and listed in their appropriate spots on the balance sheet, the sum of all their valuations is added together to get total assets.

Example

Now, let's take a look at an example of total assets in action.

Meet Emma! Emma opened Emma's Cupcake Shop six months ago. So far, sales have been good. Emma realizes that even though she has made enough money to cover expenses and keep the shop going, she really doesn't know the overall financial picture of her company. Emma's friend, Rex, offers to help her with her accounting. Rex tells Emma that the only way that she can get a good financial picture of the company is to learn how to understand the company financial statements.

One Saturday afternoon, Rex and Emma sit down for a crash course in finance and financial statements. The first thing that they do is talk about the business assets. Together they make the following lists of the company's assets:

Current Assets:

  • Cash - $2,000
  • Supplies - $3,000
  • Inventory - $2,000

Noncurrent Assets:

  • Equipment - $20,000

What are the total assets for Emma's Cupcake Shop?

total assets = current assets + noncurrent assets

  • Total assets = ($2,000 + $3,000 + $2,000) + $20,000
  • Total assets = $7,000 + $20,000
  • Total assets = $27,000

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