Intangible Assets

Intangible assets are assets that do not exist physically but have a value based on legal rights or advantages that they confer on a firm. They include patents, copyrights, trademarks, and goodwill. By their nature, intangible assets are long-term assets. They are of value to the firm for a number of years.

Northeast Art Supply lists two intangible assets. The first is a patent for an oil paint that the company has developed. The firm's account­ants estimate that it has a current market value of $6,000. The second intangible asset, goodwill, is the value of a firm's reputation, location, earning capacity, and other intangibles that make the business a profit­able concern. Goodwill is not normally listed on a balance sheet unless the firm has been purchased from previous owners. In this case, the purchasers have actually paid an additional amount (over and above the value of the previous owners' equity) for this intangible asset. The firm's accountants included a $15,000 amount for goodwill. For Northeast Art, intangible assets total $21,000. Now it is possible to total all three types of assets for Northeast Art. As illustrated in Figure 3.1, total assets are $340,000.

Liabilities and Owners' Equity

The firms' liabilities are separated into two groups—current and long term—on the balance sheet. These liability accounts and the owners’ equity accounts complete the balance sheet.

Current Liabilities.

A firm's current liabilities are debts that will be repaid within one year. Northeast Art Supply purchased merchandise from its suppliers on credit. Thus its balance sheet includes an entry for accounts payable. Accounts payable are short-term obligations that arise as a result of making credit purchases.

Notes payable are obligations that have been secured with promissory notes. They are usually short-term obligations, but they may extend beyond one year. Only those that must be paid within the year are listed under current liabilities.

Northeast also lists salaries payable and taxes payable as current liabilities. These are both expenses that have been incurred during the current accounting period but will be paid in the next accounting period. Such expenses must be shown as debts for the accounting period in which they were incurred. For Northeast Art, current liabilities total $70,000.

Long-Term Liabilities Loan

Long-Term Liabilities Loan are debts that need not be repaid for at least one year. Northeast lists only a $40,000 mortgage payable in this group. Bonds and other long-term loans would be included here as well, if they existed. As illustrated in Figure 3.1 current and long-term liabilities total $110,000.

Owners' Equity

For a sole proprietorship or partnership, the owners’ equity is shown as the difference between assets and liabilities. In a partnership, each partner's share of the ownership is reported separately by each owner's name. For a corporation, the owners' equity (sometimes referred to as shareholders' equity) is shown as the total value of its stock plus retained earnings that have accumulated to date.

Northeast Art Supply has issued only common stock. Its value shown as its par value ($15) times the number of shares outstanding (10,000). In addition, $80,000 of Northeast's earnings have been reinvested_: in the business since it was founded. Thus, owners' equity totals $230,000.

As the two grand totals show, Northeast's assets and the sum of its liabilities and owners' equity are equal to $340,000.

Key terms.

Accounts payable – кредиторська заборгованість – amounts which a company owes its creditors for goods and services purchased on credit.

Accounts receivable – дебіторська заборгованість – amounts which a company expects to collect from its customers for goods and services sold to them on credit.

Allowance for doubtful accounts – резерв на покриття сумнівних кредитів – a valuation account or contra account relating to accounts receivable and showing the portion of the receivables estimated to be uncollectible.

Balance sheet – балансовий звіт – a financial statement which shows the financial position of a business entity by summarizing the assets, liabilities, and owner’s equity at a specific date.

Current assets – поточні активи, короткострокові активи – cash and other assets that can be converted into cash within one year or the operating cycle (whichever is longer) without interfering with the normal operation of the business.

Current liabilities – короткострокові, поточні забов’язання – any debts that must be paid within one year or the operating cycle (whichever is longer), with payment being made from current assets.

Depreciation – амортизація – the systematic allocation of the cost of an asset to expense during the period of its useful life.

Financial statements – фінансові звіти – reports which summarise the financial position and operating results of a business (balance sheet and income statement).

Fixed assets – основні засоби, основні активи – assets that will be held or used for a period longer than one year.

Goodwill – гудвіл (репутація фірми) – the present value of expected future earnings of a business in excess of the earnings normally realized in the industry. Recorded when a business entity is purchased at a price in excess of a fair value of its tangible assets and identifiable intangible assets less liabilities.

Intangible assets – нематеріальні активи –those assets which are used in the operation of a business but which have no physical substance and are noncurrent.

Inventory (merchandise) – товарно-матеріальні запаси – goods acquired and held for sale to customers.

Liquidity – ліквідність – the ease (the speed) with which an asset can be converted to cash.

Long term liabilities – довгострокові кредиторські забов’язання – debts that have to be paid in more than a year.

Marketable securities – ліквідні цінні папери – a highly liquid type of investment which can be sold at any time without interfering with normal operation of a business. Usually classified as a current asset.

Notes payable – векселі видані; бухгалтерський рахунок, на якому відображені суми, які компанія повинна сплатити за векселями – a liability evidenced by issuance of a formal written promise to pay a certain amount of money, usually with interest, at a future date.

Notes receivable – векселі одержані; бухгалтерський рахунок, на якому відображені суми, які компанія повинна отримати за векселями – a receivable (asset) evidenced by a formal written promise to pay a certain amount of money, usually with interest, at a future date.

Prepaid expenses – авансовані кошти (витрати майбутніх періодів) – advance payments for such expenses as rent and insurance. The portion which has not been used up at the end of the accounting period is included in the balance sheet as an asset.

Promissory note – простий вексель – a formal written promise to pay an amount borrowed plus interest at a future date.

Retained earnings (undistributed profits) – нерозподілений прибуток – the portion of shareholders’ equity derived from profitable operations. Retained earnings is a historical concept, representing the accumulated earnings minus dividends declared from the date of incorporation to the present.