What are the positives of your business?
I say positives because with the exception of some Capital accounts, the accounts that add positive value to your company are asset accounts. Assets are things that you own and are valuable to your company and its operations.
Assets can be tangible items like a computer, car, salon chair or cash. They can also be intangible like accounts receivable and goodwill. Goodwill includes things like ideas, market branding, a unique purchase appeal and the fact that you have been in business for forty years. These are hard to value and sometimes hard to define or recognize, but frequently are a major contributor to your success.
Your Assets appear on the Balance Sheet and are in balance with the Liabilities and Capital. In other words, if you were to stick all of your assets into one side of a giant balance scale, then Liabilities and Capital would go into the other side of the scale and the two would weigh the same.
The reason for this is because of double-entry bookkeeping, for which we can thank some Italian gentleman from the 1400’s.
Also important to note is the fact that Assets, for the most part, are taxable. Some Assets, like land, buildings and vehicles are taxed on a recurring basis. So naturally you want to get rid of Assets to spare you from taxes, right?
This is not necessarily true. The correct answer here is to have a good relationship with your Accountant to help you decide the best ways to reduce taxes and yet keep a healthy amount of Assets, especially since when you go to the bank for a loan the banker wants to see as much value in your Assets as possible.
So to continue with the car analogy from last lesson, if the balance sheet is a car then the Assets could perhaps be compared to the body of the car—the shiny nice packaging for all of the other components of the car.
Just like the body of the car contributes less to the overall comfort of your ride, so do the Assets contribute less to the health of the company. The body has to be large enough to accommodate all of the necessary components for the smooth operation, but outside of that it is mostly for appearing good to others who are looking at your car.
As mentioned earlier, some of those people who might be looking at your business might be the banker offering you the loan or the investor who wants to invest his or her money in your business. So make sure to keep those Assets waxed and shiny!
Without Foundation, your business fails!