Asset Location Strategy: How to Maximize Wealth in Retirement

«Divorce isn’t just the end of a relationship; it’s also the unraveling of a financial partnership,» says Natalie Colley, partner and lead financial adviser at Francis Financial. After her divorce, she sold several mutual funds in her investment account to buy a new home for her children, believing it was the right move for their future. What Georgia didn’t anticipate was the $41,250 tax liability she incurred due to long-term capital gains taxes on the sale. Georgia was blindsided by this enormous tax bill, which was the last thing she needed as a new homeowner.

Financial ratios, such as the debt-to-equity ratio and the current ratio, use asset accounts to calculate the company’s financial position. Two accounts with the same balance what is an asset account may have vastly different tax consequences depending on how long the investments have been held, their cost basis and the investor’s income level. Gains on short-term holdings (assets held for less than one year) are taxed at higher ordinary income rates, while long-term holdings (assets held for more than one year) enjoy lower capital gains tax rates. Additionally, higher-earning spouses may face steeper taxes because of the net investment income tax (NIIT), potentially adding an additional 3.8% to their federal tax rate.

Adjusting Entries

Contra equity accounts, therefore, act as a ledger for corporate strategy, impacting how the worth of a company is perceived from the outside. Contra revenue accounts are the dedicated detectives tracking down all the subtractions from a company’s gross revenue. These accounts keep an eagle eye on sales returns, allowances, and discounts, ensuring you’re not overestimating your income.

Examples of Assets vs. Liabilities

A balance sheet heading or grouping that includes both cash and those marketable assets that are very close to their maturity dates. This account balance or this calculated amount will be matched with the sales amount on the income statement. If the revenues earned are a main activity of the business, they are considered to be operating revenues.

The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. Liquid assets like checking and savings accounts have a limited return on investment (ROI) capability.

By subtracting these amounts from the total sales, what you’re left with is net revenue— the revenue that’s truly earned and likely to stay in the company’s pocket. Maintaining contra revenue accounts empowers you to maintain healthier and more realistic expectations of financial outcomes—no rose-tinted glasses here. All this information is summarized on the balance sheet, one of the three main financial statements (along with income statements and cash flow statements).

If there is evidence that a receivable might be uncollectible, it will be classified as impaired. Or if inventory becomes obsolete, companies may have to write off those assets. Some examples of asset accounts include Cash, Accounts Receivable, Inventory, Prepaid Expenses, Investments, Buildings, Equipment, Vehicles, Goodwill, and many more. Here are some of the most common types of assets that you will frequently encounter in accountancy. Some assets provide direct economic benefits (e.g., inventory), whereas others indirectly contribute to the future cash flows of a business (e.g., office computer).

• In some accounting software, the chart of accounts is also used to designate where an account will be reported in the financial statements.
• Properly handling the division of retirement assets can make the divorce process less complex and less expensive, especially if large sums of money are involved.
• A business should be able to obtain benefits from an asset and restrict its access to others.
• Something similar to Situation 2 occurs when a company purchases equipment to be used in the business.
• Hence all these loans are assets for a bank, and the value of the bank is determined by its Price to Book ratio relative to other banks.

Some assets are recorded on companies’ balance sheets using the concept of historical cost. It represents the original cost of the asset when purchased by the company and can also include expenses (such as delivery and set up) incurred to incorporate an asset into the company’s operations. Individuals usually think of assets as items of value that they could convert into cash at some future point and that might also be producing income or appreciating in value in the meantime. Those can be financial assets like stocks, bonds, and mutual funds, or physical assets like a home or an art collection. Non-current assets are those assets that have a life of more than a year. These assets are, therefore, long term investments of the company and are generally illiquid.

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Usually a person without a four-year or five-year accounting degree employed to record routine financial transactions for smaller companies. To illustrate, let’s assume that a new company pays $6,000 on December 27 for the insurance on its vehicles for the six-month period beginning January 1. For December 27 through 31, the company should have an asset Prepaid Insurance or Prepaid Expenses of $6,000.

Types of Asset Accounts – Explanation

Asset accounts are the items tht show the stakeholders what assets the company owns as resources. Assets Accounts belong to the stakeholders, who are the debt and equity investors in the company. It is the responsibility of an investor to look at the assets reported by the company and understand its way of conducting business and if it will maximize value to shareholders in the future.

If for some reason the bank fails, your account has dollar-for-dollar coverage up to $250,000. However, since FDIC covers each financial institution individually, an investor with brokered CDs totaling over $250,000 in one bank faces losses if the bank becomes insolvent. The purest form of financial assets is cash and cash equivalents—checking accounts, savings accounts, and money market accounts. Liquid accounts are easily turned into funds for paying bills and covering financial emergencies or pressing demands.

Contra equity accounts, those intriguing components in the equity section of the balance sheet, reflect transactions that reduce the total equity available to shareholders. The most common one you might encounter is treasury stock—where companies buy back their own shares. It’s essentially a reverse investment; instead of pouring money in, the company is taking it back, reflecting a decrease in shareholders’ equity. This can have various strategic implications, from attempting to increase per-share earnings to trying to prevent takeovers.