Other Assets
General Concepts
This chapter presents many additional accounting treatments for
frequently encountered business and less-frequently found personal activities
that need recording in accounting books. The explanations below cover both the
description and purpose of the activity, and they include also the usual
accounting treatments (bookings or recordings) for these transactions.
These concepts have evolved over centuries of experience by those
keeping accounting records and will help you maximize your record keeping's
utility and meaningfulness.
This section introduces categorization of assets in the balance sheet
based on time or the asset's useful life (current and long-term). Sometimes
assets are also considered from the standpoint of their liquidity
, which is regarded as how close or distant the asset is from
being turned into cash. Near-cash assets are relatively quickly converted
to cash (e.g., accounts receivable), while assets requiring rather a long
time to convert to cash are considered to be relatively fixed
in their non-cash state (e.g., heavy equipment, buildings, land).
[Fixed does not mean they were repaired!]
You should find that current assets parallel those with more liquidity,
while long-term and fixed assets are those with much less liquidity. Finally,
below you will find a few assets that could be either current or long-term
based on the nature of the facts constituting them.
Other Assets Described
Current Assets Described
Current Assets are those activities whose
normal expected life would be one year or less. Such activities could
be tracking reimbursable expenses, travel advances, short-term loans
to a friend or family member, prepaid expenses, annual insurance
premium amortization, and so on. The individual entity could have
many other kinds of short term activities that reflect what it is
doing. [These asset types are explained individually below.]
Long-term (Fixed) Assets Described
Long-term (Fixed) Assets are those
activities whose normal expected life exceeds 1 or more years. This
grouping covers both tangible and intangible assets. Examples of
tangible assets are land, buildings, and vehicles (cars, trucks,
construction equipment, factory presses, etc.) Intangible assets
include such things as patents, copy rights, goodwill, etc. Because
the lives of some of these assets show wear and tear and deterioration
in value over time, businesses and individuals can allow for that
diminution in value by calculating depreciation on such assets. For
example, land normally does not depreciate, but buildings do, as do
equipment and vehicles. [These asset types are explained individually
below.]
Current Assets
This section explains short-term receivables, reimbursable expenses,
travel advances, prepaid premiums, prepaid rent, suspense or wash accounts.
Short-term Receivables
Short-term Receivables. This kind of account
is useful to reflect an agreement made with someone you trust.
Suppose you lent someone $500 and he agreed to repay you $50 a month.
If he paid on time, the loan you made would be paid off within a year,
which is why it is classified as a short-term receivable. So you
could record that loan initially in this account tree: Other Asset>
Current Asset>LoanToJoe. At the time you gave him the money your
entry is debit (increase) LoanToJoe $500 and credit (decrease) Bank
$500. Each time you receive Joe's payment you record $50 debit
(increase) to Bank and credit (decrease) LoanToJoe.
[Note: don't become confused by the use of the word "Loan".
"Loan-To" is the tipoff that you really have a receivable, that is,
you will receive from Joe, the money you previously loaned. Until he
actually pays the money owed you, you reflect his debt in your books
by an account describing your expectation -- you will receive the
money owed you, hence the word "receivable".]
Reimbursable Expenses
Reimbursable Expenses. This kind of activity
is one in which you spend your own money on behalf of someone else
(your employer, perhaps) and later you receive repayment of what you
spent. The case might be a business trip. The employer has a policy
of covering (paying for) all expenses that he authorizes. After the
trip is over, the employee submits a report listing dates and amounts
spent with receipts for all the expenditures. The employer reviews
the report and pays for all items that he considers belongs to his
business. [Normally, employees know in advance what the employer will
reimburse, so only those items are recorded as a reimbursable expense
on the employee's books.]
Because a business trip can involve different kinds of expenditures
(air travel, lodging, transportation at the destination, etc.),
different kinds of expenditures would be recorded in the one account
as long as the expenditures all related to the same trip. In other
words, if a second trip is made before the first is fully settled, a
second account for a different event could be set up. It would make
sense to do this, if it would help to keep separate all the details of
one trip from those of another. It is up to the person making the
trip to decide how much trouble it would be to put separate trips in
separate accounts or to put them all in the same account. The trip
taker should remember that the account must be reconciled in order to
know with certainty that all he spent has been reimbursed to him.
Recording the expenditures on the trip would be much the same.
That is, if you paid trip expenses by cash you would debit (increase) the
reimburseable expense account for the money paid in cash, because it
is a receivable to you until it has been reimbursed to you. The credit
offsetting your expenditure would decrease the account that shows the
cash in your pocket or the account from which you drew the cash for
the payment made. If you paid by credit card, the debit side would be
the same as just described, but the credit would be an increase to the
credit card company account on your books.
When you received your reimbursement, then the journal entry (or
transaction) to record receipt of the funds from the employer would be:
debit (increase) Bank for the check amount and credit (decrease) the
reimbursable expense account for the check amount.
If it turns out that the reimbursable expense account is not
zero balance after processing the employer's payment, then it means that
there is a difference between you and the employer in handling the expense,
which difference needs to be investigated. If the balance is a debit
(a positive balance), your account has some money that was not reimbursed.
If the balance is a credit (a negative balance), you were paid for more
than what you recorded as due you. In both of those situations you should
reconcile the difference between what you recorded and what was paid.
That effort should disclose exactly what is causing the discrepancy.
You will need to contact the employer's bookkeeper to know what was paid,
if the reimbursement check was not accompanied by a detailed list of the
items being paid you.
In the event the employer refused to reimburse you for an
expenditure, that effectively makes it your expense. In that case, you
would make this entry: debit (increase) your own Expense
(appropriately named) and credit (decrease) the Reimbursable Expense
account. That entry should result in a zero balance in the
Reimbursable Expense account. If not, reconcile until you identify
the difference.
[Sometimes there are small differences that don't match an
individual entry. In those cases divide the amount by 2 or by 9. If
the unresolved amount is divisible by two, it suggests that both you
and the employer entered the item in the same manner: both as debits
or both as credits. If it is divisible by 9, then likely one of you
transposed adjoining numbers; e.g., one entered 69 and the other
entered 96. If the difference is divisible neither by 2 or by 9, then
it could be that more than one error is present.]
Travel Advances
Travel Advances. These are very similar to
Reimbursable Expenses. The difference is that someone gives you his
money first; you spend it, and then you give a report accounting for
what you spent it on. The report is supported by invoices establishing
who, what, where, when, and how much for each expenditure. In the
Reimbursable Expense case, you spent your money first and later
recovered it.
In the Travel Advance case when you receive the advance, you
record on your books this entry: debit (increase) Bank for the travel
advance amount received (say, $500); credit (increase) short-term
liability -> Travel Advance ($500). This is a liability, because
you are not gifted with the money, but only loaned it for the purpose
of having funds to spend when doing the employer's business.
Frequently, the way these monetary arrangements work is that at
the beginning of the salesman's employment, he receives the advance
and monthly (or more frequently) turns in a report about who, what,
where, when, and how much he spent. The money in the report is paid
to him in the amount the report asks for, assuming all was approved.
During the period after receiving the advance and before filing
a request for reimbursement report, he can record his expenditures into
the advance liability account. If he does that, the balance
in the account will show how much of the advance he has not yet spent
(assuming the Travel Advance balance is a credit). If no mistakes have
been made and all expenses are approved, then the sum of the unspent
account balance and the reimbursing check amount will equal the original
travel advance amount.
That he records the travel expenses to this advance account (and
not to his own expense accounts) makes sense, because he is spending
his employer's money for the employer's authorized expenses. He is
not spending his own money for his own books to record as his expenses.
When he receives the report reimbursement (say, $350), he debits
(increases) Bank, and credits (increases) again the Travel Advance
liability account, assuming that previously he had been recording
expenditures to the travel advance account. Tracking activity in this
manner causes the account always to show the amount that he owes the
employer.
See the Reimbursable Expense discussion above for what to do if
the employer does not accept an item the employee put on the travel
advance reimbursement request report. The difference resolution effort
is essentially the same for both types of accounts.
Prepaid Premiums or Prepaid Rent
Prepaid Premiums or Prepaid Rent. Some types of
expenses are usually billed as semi-annual or annual amounts. For
example, the insurance industry will bill home insurance annually,
while car insurance premiums can be annual or semi-annual. For those
that pay an amount that covers several months or a full year, the
proper accounting treatment is to reflect in each accounting period
the amount that expresses the benefit applying to that period.
In the case of someone who pays a full-year's insurance premium
at the beginning of the insurance period, the entry to record this is
debit (increase) Prepaid Insurance Premium for say, $1200, and credit
(decrease) Bank for $1200.
Then a monthly recurring journal entry (scheduled transaction)
is created that debits (increases) Insurance Expense $100 and credits
(decreases) Prepaid Insurance Premium $100. This technique spreads
the cost over the periods that receive the insurance coverage benefit.
Businesses following generally accepted accounting practices would
normally use this technique, especially if they had to present
financial statements to banks or other lenders. Whether individuals do
depends on the person and how concerned they are to match cost with
benefit across time periods. Another factor influencing use of this
technique would be the number of such situations the person encounters.
It is relatively easy to remember 1 or two, but more difficult if
having to manage 10 to 20. You would set up as many or as few as proved
useful and important to you.
Suspense or Wash Accounts
Suspense or Wash Accounts. The purpose of
these accounts is to provide a device to track "change of mind" situations.
The objective of these accounts is to provide a temporary location to
record charges and credits that are not to be included permanently in
your books of record. When the transactions reflected in these accounts
have been fully completed, Wash/Suspense accounts will normally carry
a zero balance.
For example, say in the grocery store you see canned vegetables on sale,
so you buy 6 cans at $1 per can. Say that the total purchases were $50.
When you come home and are putting things in the cupboard you discover
you already had 12 cans. You decide to return the 6 you just bought.
Some persons in this situation would charge (increase) the whole bill
to Grocery Expense; and when they returned the cans, they would credit
(decrease) Grocery Expense. That is one way of handling that. The effect
of this method is to leave recorded on your books the cost of items that
you really did not purchase from a permanent standpoint. It is only
when the items have actually been returned and the vendor's return
receipt has also been recorded that the distortion this method generates
will then be removed.
Actually, there are several treatments, depending on when and how
the original transaction was booked/recorded and when you decided to
return the items purchased. Basically, did you change your mind before
you recorded the transaction or after doing so?
If you decided to return the items after recording the purchase
transaction, you may originally have charged Grocery Expense for the full
amount ($50) of all items. In that scenario, what you kept and the amount of
the items to be returned were grouped into one account. You could edit the
original transaction and restate the amount charged to the Grocery Expense
account to be the difference ($41) between the total paid ($50) for groceries
and the value of the items to be returned. That leaves the returned-item
value as the amount ($6) you should record to the Suspense account.
Obviously, if you decided to return items before you recorded your
purchase, then you would book the original entry as a charge to Grocery
Expense for the amount kept ($41) and as a charge to Suspense for the
amount returned ($6). The off-setting credit ($50) to cash or credit
card is not affected by these treatments.
When there are several persons shopping and at different vendors,
there can be a case where there are several returns happening at once
and in overlapping time frames. In that case the Wash Account is
charged (increased) at time of changing the mind, and either Bank or
Credit Card is credited. When the return occurs, the reverse happens:
Bank or Credit Card is debited for the cash value of the returned items
and the Wash/Suspense Account is credited in the same amount.
If the wash account has a non-zero balance, scanning the debit
and credit entries in the account will show the non-matched items.
That is, debits not matched by offsetting credits indicate items
intended to be returned but not actually returned yet. The reverse
(credits not matched by offsetting debits) indicates that returns were
made but the original charge was not recorded in the Wash Account.
These differences can be cleared up by returning unreturned items
or recording charges (debits) for items already returned. The mechanics
of doing that likely will be finding the original expense account the
item was charged to and making an entry like: debit Wash Account, credit
original expense. It also could be as described above where the original
recording is adjusted by adding a charge to Wash/Suspense account and
decreasing the amount charged to the original account.
Short or Long-term Assets
This section explains why some types of assets may be short or
long-term and presents an example.
An example is deposits (e.g., utility, rental, security). If the
deposit agreement contains a provision to recover the deposit at the
end of a year, the treatment could be that of a short-term asset.
However, when the agreement is that the deposit holder returns the
funds only upon successful inspection at the end of the relationship,
then at the start of the relationship or agreement, the person paying
the deposit has to decide whether to write it off as a current expense
or to track it for eventual recovery at the end of the agreement
(not infrequently, moving to a new location).
Whichever decision is made, the accounting treatment is to debit
(increase) expense [assuming the write-off decision] or debit (increase)
Deposits Receivable [assuming the intent is to recover the deposit in
the future] and credit (decrease) Bank for the amount of the deposit
(if paid by cash) or credit (increase) credit card if paid using that
payment method.
Long-term (Fixed) Assets
This section illustrates long-term assets (those whose useful lives
exceed 1 year) and discesses these types: land, buildings, leasehold
improvements, intangibles, vehicles and other equipment.
Land
Land is not a wasting asset. That is, it
does not get used up over time and rarely suffers damaage such that it
loses value. For that reason, it usually is recorded at cost at the
time of purchase. Appreciation in its value over decades is not recorded
and is not recognized in any way on the books of the owner. It is only
after land has been sold that sale price and purchase cost are compared
to calculate gain or loss on sale.
Land is frequently sold/purchased in combination with structures
upon it. That means that the cost has to become separated from the
cost of structures on it. Land valuation is usually part of the trans-
fer of ownership process and its value is shown on the purchase documents
separately from that of any structures it supports.
Land values shown on purchase documents frequently arise from the
process of value determination managed by assessors whose job it is
to assign values to land for tax purposes. Local and regional areas of
a state or province use the values determined by assessors in their tax
formulas, which provide revenues for local and regional governing
authorities to finance their required community services.
Should land be acquired in a situation not subject to a history of
land valuation by a formal valuation system, then the purchaser can appeal
to real estate agents and an examination of recent sale transactions for
information that would allow calculating a reasonable amount to express
the value of the land.
Buildings
Buildings are the man-made "caves" in which
much of life's human interaction occurs. These structures are wasting
assets, because in their use they or their components gradually wear.
Over time they begin to lose some of their function and they can suffer
damage due to planetary elements or human action.
Accepted accounting practice is to record the cost of the building
determined at time of ownership transfer (purchase) or at conclusion of all
costs of construction. Because buildings are frequently used for decades,
and due to the need to be able to calculate gain or loss on sale,
accounting practice preserves the original cost by not recording declines
in value in the account containing the original purchase or construction
cost.
Instead, the depreciation technique is used to show [in the
balance sheet] the structure's net book value [original cost reduced by
accumulated depreciation]. Depreciation is a separate topic treated
elsewhere in this Guide.
Leasehold Improvements
Leasehold Improvements. When a business does
not own the building where it does business, and instead has a long-term
lease, it is not uncommon for the business tenant to make improvements to
the premises so that the structure obtains both function and appearance
that enhances conducting its business activities.
In these cases, the expenditures that the business incurs are recorded
in a Leasehold Improvements account: increase (debit) Leasehold Improvements,
decrease (credit) Bank or increase (credit) a suitable liability account
[which could be a liability to a contractor or a bank or a credit card,
etc.].
Vehicles or Equipment
Vehicles or Equipment of all kinds usually
last for several years, but their useful lives are much shorter than
that of assets that have little movement in their functioning. Because
they do wear out over time, common accounting practice in business is
to record depreciation using life spans and depreciation methods
appropriate to the nature and use of the asset. Frequently, the life
and depreciation methods chosen are influenced by what is permitted per
national tax regulations for the kind of asset being depreciated.
Usually, businesses depreciate their assets. Individuals can
do so as well to the degree that taxing authorities permit. Very wealthy
persons employ accountants and attorneys to track and manage their
investments and assets holdings to take advantage of all tax benefits
permitted by law.
Intangibles
Intangibles. The mechanics of accounting (debiting
and crediting appropriate accounts) for these assets are relatively simple,
much the same as for any of the above assets. Where the difficulty lies
is in their valuation, which is an advanced topic and not something that
individual persons and small businesses would likely encounter. For that
reason further discussion of items such as patents, copyrights, goodwill,
etc. are left until someone has an actual need for such information.