Average Total AssetsDefined along with Formula & How to Calculate

Written By:
Adiste Mae

What are Average Total Assets?

The Average Total Assets refer to a company’s total assets of the previous accounting period and the current period.

The computation for the average total assets is necessary for companies to evaluate how efficiently they are utilizing their assets.

Funding the operations of a company is done through the employment of assets, and when these assets are utilized at maximum efficiency, this is reflected in the sales that companies generate within a given period.

The average total asset formula gives companies the ability to identify where they can improve their processes and effectively use their assets to achieve this.

The formula for computing the Average Total Assets is:

Average Total Assets = (Total Assets of the Current Year + Total Assets of Previous Year) / 2

Total Assets include all current and noncurrent assets of the company as of the end of the accounting period (both current and previous) and other assets.

Importance of Average Total Assets

The figure derived from the computation of the average total assets is compared to the current year’s sales figure in order to ascertain the amount of assets that companies require in order to reach their targeted sales.

When the average total asset is lower than the total sales for the current period, this indicates that the company has efficiently used their assets in the operations of the business resulting in high profitability and indicates growth.

However, when the average total asset is higher than the sales, this could mean that the assets are not used effectively to produce the sales that a company wishes to achieve.

How to Calculate the Average Total Assets

In the computation of the average total assets, there are only two important data to be determined: (1) the total assets of the previous year and (2) the total assets of the current year.

This information is available on the Balance Sheet reported by the company at the end of each accounting period.

When the amount of total assets of the previous year and current year is determined, they should be added together and then divided by two in order to get the average.

Average Total Assets Example

To illustrate how the calculation of the average total assets is done, assume the below example.

Company X has extracted the following information from their Balance Sheet for the year 2020 and 2021:

Based on the above information, the formula to compute the average total assets can be applied:

Average Total Assets = (Total Assets of the Current Year + Total Assets of Previous Year) / 2

Average Total Assets = ($1,415,400 + $1,424,000) / 2

Average Total Assets = $2,839,400 / 2

Average Total Assets = $1,419,700

Benefits of using the Average Total Assets Formula

Companies need to accurately compute the total average total assets in order to properly conduct an analysis for the company.

Among the many benefits of knowing how to effectively calculate the average total assets of the company include the following:

Provides Information on Maximizing Sales

The sales growth of companies are influenced by how efficient the assets are being utilized to achieve the sales objective of the company.

Activities geared towards sales generation require assets and when companies have just the right amount of assets acquired and used towards important activities, then those responsible to increase the sales will have better means of making that happen.

Gives Indication of Effective Asset Management

When the assets of the company are effectively managed and utilized, it guarantees that companies are better able to generate a return for their investment.

More than companies reinvesting in activities that increase sales, asset allocation is just as important.

Each asset that a company employs in their operations helps in increasing the sales of the company, which means that no asset should be put to waste.

Helps Compute Other Important Financial Metrics

The computation for Debt to Asset Ratio and the Asset Turnover Ratio requires that the Average Total Assets should be computed first.

When this is done correctly, these financial metrics will be computed correctly as well.

Another important financial ratio that can be computed based on the average total assets is the Return on Average Assets, which is computed to determine the financial position of the company and its profitability.