Classification of Assets and Liabilities
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Classification of Assets and Liabilities

Classification of Assets and Liabilities Proper classification of assets and liabilities is necessary as otherwise the Balance Sheet may fail to provide meaningful information. The various items of assets and liabilities in the Balance Sheet should be properly grouped. Classification of Assets

Classification of Assets and Liabilities

Proper classification of assets and liabilities is necessary as otherwise the Balance Sheet may fail to provide meaningful information. The various items of assets and liabilities in the Balance Sheet should be properly grouped.

Classification of Assets

Assets may be divided into the following categories.

1. Fixed Assets: These assets are of a permanent nature. These are acquired for the purpose of generating revenue and are not meant for resale. Examples of fixed assets are : land, buildings, plant and machinery, motor vehicles, furniture and fixtures, patents, goodwill, etc. As the purpose of these assets is use, changes in their market value are ignored. These assets are shown in the Balance Sheet at cost less depreciation, giving details about both the figures. Total of fixed assets is called gross block, Gross block minus depreciation is known as net block.

The fixed assets which have a limited useful life and which depreciate rapidly are called wasting assets, e.g., mines, quarries, etc. Goodwill and patents which cannot be seen are known as intangible assets. Assets like plant and machinery, stock, cash, etc., can be seen and felt, and are therefore called tangible assets.

2. Investments: These include the money invested in various kinds of securities. Investments may be of two types — long term investments and short term investments. Long term investments are treated as fixed assets whereas short term investments are treated as current assets.

3. Current Assets: These assets are acquired and held for consumption or resale in the ordinary course of business. These are converted into cash within a short period of time. Current assets include cash and bank balances, sundry debtors, short term loans, closing stock, prepaid expenses, interest receivable on investments and other accrued income, advances against supply of raw materials. These assets are also known as circulating assets.

4. Fictitious Assets: These assets are not represented by possession of any property and, therefore, have no market value. Preliminary expenses, discount on issue of shares and debentures, etc are examples of fictitious assets. These are to be written off against Profit and Loss Account.

Classification of Liabilities

Liabilities may be classified as follows.

1. Fixed Liabilities: These liabilities are repayable after a long period of time. These are not repayable within a short period or during the operating cycle of business. Long term loans, loans or mortgage, and debentures are examples of fixed liabilities.

2. Current Liabilities: These liabilities are repayable within a year or in the near future. These include trade creditors, bills payable, outstanding expenses, bank overdraft, etc.

3. Contingent Liabilities: These are anticipated liabilities. These are uncertain and may or may not arise in future on the happening of a certain event. If the contemplated event occurs, a contingent liability becomes a real liability. Liability on bills discounted, disputed claims or liability under a damage suit, guarantee for a loan is examples of contingent liabilities.

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