For the purpose of valuation, assets are usually classified into fixed assets, circulating or floating or current assets, wasting assets, intangible and fictitious assets.
Fixed assets are assets of a permanent nature which are acquired for the purpose of earning profits by producing goods or providing services and are not meant for resale in the normal course of business. However, it is not easy to say which assets are fixed and permanent and which assets are non-permanent and current or floating. It depends upon the nature of the asset and the use to which it is put. For example, machinery is a fixed asset for a jute mill but it is a floating or current asset for concern which deals in machinery. Again, shares and securities are fixed assets for a trust company as these are investments acquired to earn profits and to hold them permanently but these are current assets for a firm of share brokers.
Current or floating assets are those in which the business deals and which are acquired for resale or produced for the purpose of sale or converting them into cash at the first opportunity. Such assets are: stock, book debts, bills receivable, cash, etc.
Thus current assets are those in which the business deals while fixed assets are those with which it deals. Current assets are held with a view to conversion into cash, while fixed assets are held with a view to their use in the business for earning revenue. The mode of valuation for the two kinds of assets should therefore be different.
Wasting assets are those fixed assets which are gradually con-sumed or exhausted in the process of earning income (e.g. mine, quarry, oil well, etc.). Wasting assets thus differ from other fixed assets which suffer a decrease in value due to wear and tear or obsolescence.
Intangible assets are those assets (like goodwill, copyright, patents, trade marks etc. which cannot be seen or touched.
Fictitious assets are those which have no real existence or real value. These are items grouped under assets in a Balance Sheet such as the debit balance of the profit and loss account or payment made in advance.
Mode of Valuation of Different Assets
Fixed assets are valued in accordance with their ability to earn profits. Hence they are valued at what is known as a “going concern” or “conventional” or “historical” value. Fixed assets are. therefore stated-in the Balance Sheet at cost less the depreciation written off to date Depreciation is normally calculated on such a basis as spread the expenditure equitably over the effective lifetime of assets, so that the Profit and Loss Account of each accounting period may be charged with the proper proportion of the cost. In short, fixed assets are valued at their estimated value to the business.
Fixed assets of a wasting nature that are gradually consumed or exhausted in the process of earning income (e.g., a mine, quarry, etc.) should be written off during their lifetime. Such assets are stated in the Balance Sheet at their written down balance, from year to year, which represents the unexpired capital outlay that is being carried forward.
Current assets should, as agendal rule, be valued for Balance Sheet purpose at cost or marketp rice or realisable value whichever is lower, at the date of the Balance Sheet. Such assets are held with a view to conversion into cash, and making a profit dealing in them. Hence the valuation placed on these assets at the date of the Balance Sheet shall be such that any loss sustained in connection therewith is taken into account. On no account should current assets be valued above cost price, as the effect would he to take into account an estimated and unrealised profit.