Assets are things that hold value or a resource of value that can be converted into cash later on. Individuals, companies and governments hold assets. Assets generate revenue for companies, or a company might benefit in some way from owning or using assets.
Assets are reported on a company’s balance sheet. Assets are classified as current, fixed, financial, and intangible. They are bought or created to increase a firm’s value or benefit the firm’s operations. There are 6 main types of assets.
| Current Assets | Current assets are all the assets of a company that are expected to be sold or used as a result of standard business operation over the next year. These can include; cash, cash equivalents, accounts receivable, stock inventory, marketable securities, prepaid liabilities, and other liquid assets. |
| Non-Current Assets | Noncurrent assets are a company’s long-term investments that are not easily converted to cash or are not expected to become cash within an accounting year. These can include, real estate, patents, equipment, tools, and machinery. |
| Tangible Assets | Tangible assets are assets that have a finite monetary value and usually a physical form. These include; real estate, cash, office supplies, vehicles, and equipment, tools, and machinery. |
| Intangible Assets | An intangible asset is an asset that is not physical in nature, such as a patent, brand, trademark, or copyright. |
| Operating Assets | Operating assets are those assets acquired for use in the conduct of the ongoing operations of a business. Assets that are needed to generate revenue. These include; equipment, tools, machinery, cash, real estate, patents, and inventory. |
| Non-Operating Assets | Non-operating assets are assets that are not considered to be part of a company’s core operations. A company’s non-operating assets may be unused land, spare equipment, investment securities. These include; unused land, marketable securities, unallocated cash, short-term investments, and spare equipment. |
What is an Asset?
An asset is something containing economic value and or future benefit for a company. Assets often generate cash flows in the future, such as a piece of machinery, a financial security, or a patent. There can be personal and corporate assets. Examples of personal assets include a house, a car, investments, artwork, or home goods. For corporations, assets are listed on the balance sheet and netted against liabilities and equity.
What are the Properties of Assets?
There are three key properties of an asset:
| Ownership | Assets represent ownership that can be eventually turned into cash and cash equivalents. |
| Economic Value | Assets have economic value and can be exchanged or sold. |
| Resource | Assets are resources that can be used to generate future economic benefits. |
What is the Classification of Assets?
There are three classifications for assets:
| Convertibility | Classifying assets based on how easy it is to convert them into cash. |
| Physical Existence | Classifying assets based on their physical existence–tangible vs. intangible assets. |
| Usage | Classifying assets based on their business operation usage/purpose. |
What are the Examples of Assets?
Some examples of assets can be found on a firm’s balance sheet. These include:
- Cash and cash equivalents. This can be cash accounts, money markets, and certificates of deposit (CDs).
- Marketable securities. This can include equity (stocks) or debt securities (bonds) that are listed on exchanges and can be sold through a broker.
- Accounts receivable. This is money owed to the company for selling their products and services to their customers.
- Inventory. This is goods that have been produced and are ready for sale.
- Prepaid expenses for goods or services to be received in the near future.
Which Type of Asset are Short-term Economic Resources?
Short-term assets or securities in investments refer to assets that are held for less than one year. Current assets refers to a short-term asset, which means, expected to be converted into cash in less than one year, or a liability, coming due in less than one year. Both accounts receivable and inventory balances are current assets. Short-term or current assets are applicable when calculating several important financial ratios, such as the current ratio, turnover ratio, and measuring the liquidity of a company.
How Do Assets Function?
Assets create or preserve wealth, which make them very important to both individuals and companies.
Why do we Use Assets?
We use assets because they are an easy way to create cash flow. Assets help to generate revenue and can increase your business’ value. You can use them to lower your tax bill and increase the efficiency of your business.
How Can You Tell If Something Is an Asset?
There are three categories to help you to classify assets in business:
- Convertibility: you can classify your assets based on how easy it is to convert them into cash.
- Physical existence: classifying assets based on their physical existence as tangible or intangible assets.
- Usage: this category allows you to classify assets based on how they are utilized in your operation.
Why is Asset Classification Important in Business?
It is important to classify assets in the financial statement properly. Otherwise, the financial statement may be misleading. It will result in an incorrect representation of working capital. Asset classification is necessary to understand which assets help in revenue generation and which do not contribute. It also helps to identify the solvency of a business.
What Exactly is an Asset According to IFRS?
The International Financial Reporting Standards (IFRS) state that an asset is, “a present economic resource controlled by the entity as a result of past events.”
What Is the Connection Between Assets, Liabilities, and Equity?
Assets, liabilities, and equity are accounting data that are important as they help show the financial position of a person, business, or other organizations. Assets are things that you own that have a dollar value. Liabilities are the debts you owe. Equity are the differences between the total assets and liabilities. They also share a relation where the three of them can make an equation such as assets – liabilities = equity.
| What we own | What we owe |
| Assets
A piece of equipment value $100,000 |
Liabilities
–What we owe to creditors –Such as a bank loan for $80,000 Equity –What we owe to shareholders –Such as a certificate of ownership for $20,000 |
What is the Role of Financial Assets?
Financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are all examples of financial assets. Their value reflects factors of supply and demand in the marketplace in which they trade.
Financial assets help the flow of money. They transfer funds from people who have excess funds to those who need funds, whether that be individuals, companies, or even the government. Financial assets are a promise or claim on future cash.
Is Labor a Valuable Asset?
Labor can be considered a valuable asset depending on the perspective. Labor expenses appear on the balance sheet as well as an item on the profit and loss statement. Labor falls under a current liability account, a work in progress and as a capitalized expense.
Wages payable are the current liability account that holds salaries waiting to be paid, usually at the end of the month. Employees’ salaries are labor costs that must be considered as a part of the raw materials’ transformation. The labor costs are included as part of the inventory asset on the balance sheet in an account called Works in Progress.
Capitalized labor expenses is an independent concept from works in progress and wage payable. Capitalized labor refers to the way in which labor that produces long-term assets can be capitalized on the balance sheet, meaning the current period’s book record of labor is only a portion of the total value created in the current period.
