Both the accountants and the IRS created rules to define the difference between cash and assets, because the relationship between cash and assets has an impact on the organization’s reported Net Income.  It boils down to the length of time that your purchase has value.  Assets are simply those purchases that have life (or value) in the future, e.g. a computer or a truck.  Expenses on the other hand are those that have a relatively short life (or value), e.g. electricity—once used it no longer has value to you.

When a purchase is considered an expense, it is immediately reduces the company’s net income.  An asset doesn’t reduce net income until it no longer has future value.  It is important to know what assets you have so that you don’t lose its future value.  Most companies employ both physical and accounting controls to protect their assets.

In accounting for the assets, all of the them are recorded in your General Ledger, but the real key to keeping track of them is through Subsidiary Ledgers.  The Subsidiary Ledger that you probably see most often is the accounts receivable listing.  Without such a detail listing, it would be quite difficult to know which customers still owe you money.

Fortunately, in our clients we have found that most of them have reasonable physical and accounting control over their assets.

However, one area that usually has weak accounting control is for Inventory.  Inventory is all of the items purchased for resale, or for producing a product.  In many smaller companies, the individual items purchased for inventory are not accounted for. 

In many companies, inventories have a significant impact on profitability, and, yet companies offer many reasons for not properly accounting for them. 

In our Management Information Reporting Division, we agree that it takes a good degree of effort to implement an effective Inventory Management System.  Before undertaking the implantation, management should understand the benefits of an inventory system.  They include:

• Profitability impact of slow-moving and fast moving items
• Profitability impact for having a stock out
• Profitability impact of inventory shrinkage
• Profitability impact of proper costing of items sold

Contact our Management Information Reporting Division for further discussion on Asset Control and Inventory Management.