It may seem good to have lots of assets in one portfolio. But when it comes to actual value, many assets can be quite deceptive. The accounting profession well understands the peculiar status of “assets”. Thus, in structuring a balance sheet, they draw a distinction between “current assets” and “other assets”.
“Current assets” are generally defined as cash and items readily convertible into cash”. Holdings of securities that are traded on a major exchange would be considered as “current”. So would treasury notes and registered checks.
Real estate holdings, be they residential or otherwise, would not make the “current” classification but rather would be in the “other” category because they are not “readily” convertible into cash.
So, even though one of the “other” assets may look like a real winner because it has advanced significantly from its acquisition price, that observation may be more than a bit overly optimistic or premature.
Nowhere is this situation more evident than in the real estate field, especially in the midst of the uneasy market conditions that have prevailed for the last several years. Many were the happy homeowners who witnessed their home escalate into the $ 600,000 – $ 700,000 price range during the midst of the industry “bubble”. Alas, today, ever so many are mournfully suffering through a retrenchment in market value to a $ 400,000 – $ 500,000 level. Absorbing a loss of a couple hundred thousand dollars in assets is no easy undertaking.
Amid all the anguish, however, perhaps it might be well for these owners to reflect on the fact that their property was never a “current asset” of $500,000 – $ 600,000 unless they were selling it to a ready, willing and able buyer at that price. Moreover, given the status of the market prior to and during the early stages of the “bubble”, changes are that they purchased the properties for considerably less than today’s sales level. In situations such as these, owners whose homes sell in today’s market range of $ 400,000 – $ 500,000 have not suffered a real asset loss but rather a rather tidy profit as compared to purchase price. At least that’s how most accountants would figure it.