This figure represents more accurate numbers for the assets used in the business throughout the accounting period. Why is the average total asset calculated?Īverage total asset is calculated to be used in the calculation of ratios. Different ratios are calculated to analyze the average asset base in connection with the return, including asset turnover, return on average assets, fixed assets turnover, etc. A business with a lower asset base and higher return is considered more desirable and vice versa. The asset base of the business is often analyzed in connection with its return generating ability. See also Accrued Wages (Definition, Measurement, Classification, and Journal Entry) Further, the following formula is used in the calculation of average total assets However, the use of the average assets is more useful if there is greater fluctuation in the business’s asset base. It’s important to note that closing assets of the business can also be used in performance evaluation. However, if we think about going concern basis, performance-related factors should be prioritized while investing. In case of liquidation, there are higher chances of recovery if the business has a strong assets base. Investors and lenders feel more relaxed while investing in the asset incentive business. However, the liquidity perspective is different regarding non-current assets. These assets include property plant and equipment, long-term investments, and other long-term assets.Īgain, with perspective to performance appraisal, it’s good to maintain a low base and generate a higher return.
On the other hand, other types of assets are non-current assets. This helps to reduce the cost of financing for the assets and enhance business profitability. So, with perspective to performance evaluation, it’s desirable to have fewer assets and more revenue.
These assets include inventory, cash, accounts receivable and other assets, etc.Īs we understand, these assets are obtained via equity or debt, and there is a cost associated with each of the cases. The business’s current assets are usually implied to run business operations or fulfill the needs of working capital. There are two types of assets implied in the business: current assets and non-current assets. This figure is calculated by adding opening and closing assets and dividing them by two. This figure is mostly used in calculating the activity ratio, where revenue generated by the business is compared with the total assets implied by the business in operations. These assets are calculated with the opening and closing of the total assets in the business’s balance sheet. Average total assets are the assets used by businesses throughout the accounting period.