Assets & Investments – Interpretation in Balance Sheet

Assets are resources which are expected to provide a firm with future economic benefits, by the way of higher cash inflows or lower cash outflows. Resources are recognized as assets in accounting when (a) the firm acquires rights over them as a result of a past transaction and (b) the firm can quantify economic benefits with a fair degree of accuracy.

Assets are classified as follows under the companies act:
1. fixed assets
2. investments
3. current assets, loans, and advances
4. miscellaneous expenditure and losses

Fixed assets, also called non current assets, are assets that are expected to produce benefits for more than one year. These assets may be tangible or intangible. Tangible fixed assets include items such as land, buildings, plant, machinery, furniture, and computers. Intangible fixed assets include items such as patents, copyrights, trademarks, and good will.

Tangible fixed assets are reported in the balance sheet at their net book value less accumulated depreciation – depreciation represents the allocation of the cost of a tangible fixed assets to various accounting periods that benefit from its use. Likewise, intangible fixed assets are reported at their net book value, which is simply the gross value less accumulated amortization- amortization represents the allocation of the cost of an intangible fixed asset to various accounting periods that benefit from its use.


Investments represent financial securities owned by the firm. They are dividend into two categories, viz. Long term investments and current investments.

Long term investments generally comprise financial securities like equity shares, preference shares, and debentures of other companies, most of which are likely to be associate companies and subsidiary companies. These investments are made for income and control purposes. Long term investments are stated at cost less any diminution of value which is regarded as permanent in the opinion of management.

Current investments generally represent short term holdings of units or shares of mutual fund schemes. These investments are made primarily to generate income from short term cash surplus of the firm. Current investments are carried at cost or market value, whichever is lower.

One may argue that current investments, being short term in nature, may be classified under the asset category current assets, loans, and advances. Under the format prescribed in the companies act, however, current investments also have to be shown under the asset category investments.

Current assets, loans and advances:

This category consists of cash and other assets which get converted into cash, or which result in cash savings, during the operating cycle of the firm. The major components of current assets, loans and advances are: inventories, sundry debtors, cash and bank balances, other current assets, and loans and advances.

Inventories comprise raw materials, work in progress, finished goods, packing materials, and stores and spares. Inventories are generally valued at cost or net realizable value, whichever is lower. The cost of inventories comprises purchase cost, conversion cost, and other cost incurred to bring them to their respective present location and condition. The cost of raw materials, stores and spares, packing materials, trading and other products is generally determined on weighted average basis. The cost of work in progress and finished goods is generally determined on absorption costing basis this means that the cost figure includes allocation of manufacturing overheads.

Sundry debtors represent the amount owed to the firm but its customers and others. Sundry debtors are classified into two categories, viz. debts outstanding for a period exceeding six months and other debts. Further, sundry debtors are classified as debts considered good and debts considered doubtful. Generally, firms make a provision for doubtful debts which is equal to debts considered doubtful. The net figure of sundry debtors is arrived at after deducting the provision for doubtful debts.

Cash and bank balances comprise cash on hand and balance with scheduled banks and non scheduled banks.

Other current assets comprise items such as interest accrued on investments, dividends receivable, and fixed assets held for sale.

Loans and advances comprise items such as advances and loans to subsidiaries, advances recoverable in cash or in kind for value to be received, and deposits with governmental authorities. The net figure of loans and advances is arrived at after deducting a provision for doubtful advances, if any.