Assets are resources that have economic value. An asset can be owned by an individual or a corporation. A country can also own or control assets if they expect they will provide future financial benefits. An asset is reported on the balance sheet. There are four classifications for assets, current, financial, fixed, and intangible. An entity purchases or creates assets to increase the value of the firm or benefit its operations in some way.
Businesses consider assets to be something that has the potential to generate cash flow, improve sales, or reduce expenses. An asset can be anything from manufacturing equipment to a patent.
What is an Asset?
Organizations or individuals own assets, which are resources that provide economic value. An asset helps the organization, company, or individual generate revenue. Assets may also help to reduce expenses. Cash, property, rights, patents, equipment, or anything that helps generate revenue are assets.
Assets are obtained through events or transactions. It is expected that an asset will provide future economic benefits either directly or indirectly. For example, cash provides a direct source of value, while manufacturing equipment generates revenue indirectly over time.
Assets are important to businesses because they are used for operations and help generate profit. Assets are also one of the three concepts used in the fundamental accounting equation. These three concepts include assets, liabilities, and equity.
What does an Asset Represent?
Assets represent economic resources. They are controlled by or owned by a company, organization, or an individual. An economic resource produced monetary benefits as it generates cash inflows. However, they may also bring economic benefit to an organization by decreasing cash outflows.
Assets may also represent access that other firms, organizations, or individuals do not have. An asset is legally enforceable. That means economic resources can be used at the discretion of an organization. The use of assets can be limited or precluded by owners. To be considered an asset, an entity must have the right to it per the date listed on its financial statements.
Who Owns an Asset?
Assets must be controlled or owned by an entity. Organizations, governments, and individuals may own assets. Owning an asset or assets enables an individual or organization to convert them into their cash equivalents or cash. Establishing ownership also limits others from having control of the assets or from using them. Others may lease an asset, but it cannot be sold or transferred unless there is a binding agreement. For instance, a company may own a piece of land while leasing the building on the property. Assets may be owned by individuals, governments, or organizations.
- Individuals. Assets owned by an individual or a household are called personal assets. These assets represent either present or future value. Common examples include cash, checking, and savings accounts, money market accounts, and CDs. An individual may own land or property. Personal property such as jewelry, boats, collectibles, and vehicles are classified as individual assets.
- Companies. For a company, an asset is anything that helps sustain production and growth. Business assets include raw materials, inventory, property, and machines. Intangible business assets include patents, intellectual property, and royalties.
- Governments. Local and national governments own a variety of assets. Most of the assets owned by governments are in the form of real estate or companies. Governments provide guidance on how assets are used to generate revenue. The government owns buildings, undeveloped land, air rights, roads, and other spaces.
What is the Importance of Assets?
Assets help determine the net worth of a company or organization. When lenders consider issuing a loan to a company, the company’s assets come into play. An asset is a resource that is controlled by the business. Assets are expected to bring future economic benefits to the company. An asset brings value to a company since it can be used to generate revenue. Assets can also be converted into cash. Assets can be physical or tangible items such as property or machinery. But they can also be intangible, like intellectual property. Assets are reported on a balance sheet.
What are the Types of Assets?
Assets can be categorized in several ways. Generally, classifying an asset type is based on how fast the assets can be converted to cash, whether they are physical or intangible, and by their use or purpose. Here are the basic types of assets.
- Current Assets: A current asset is expected to be consumed or converted into cash within a year. Current assets include inventory, some prepaid expenses, accounts receivable, and cash or cash equivalents. Cash is easy to value, but accountants must periodically reassess inventory and accounts receivable to determine their current values.
- Fixed Assets: Resources with an expected life of more than a year are classified as fixed assets. Some examples of fixed assets include equipment, building, and factories. Fixed assets depreciate as they age. This helps to allocate the asset’s cost over time. Depreciation may reflect the asset’s loss of earning power, but it does not have to.
- Financial Assets: Investments in assets and securities in other institutions are financial assets. Examples of financial assets include stocks, preferred equity, corporate bonds, sovereign bonds, and other hybrid-type securities. Financial assets get their value from market supply and demand.
- Intangible Assets: Economic resources without a physical presence are intangible assets. These include goodwill, copyrights, trademarks, and patents. Accounting for intangible assets may differ based on the type of asset. Each year they are either amortized or tested for impairment.
What are some Examples of Assets?
Assets are any items owned or controlled by individuals, companies, or organizations that are intended to increase their net worth. This is the opposite of liabilities that decrease net worth. Different entities have a variety of assets. For example, business assets differ from assets belonging to an individual. Here are some examples.
- Examples of individual assets include fine art, appliances, vehicles, stocks and bonds, and property.
- Examples of business or company assets include machinery, inventory, property, and intellectual property.
- Examples of government assets include property, roads, lands, buildings, equipment, and software.
What is the total Asset Formula?
Individuals, organizations, and businesses need to know their total assets. To calculate total assets, the current and non-current assets are added together. The sum of these two has to equal the sum of the total liabilities and the stockholders’ equity. The total asset formula is:
Current assets + non-current assets = total assets
The current assets are the ones expected to be converted to cash within a fiscal year. Non-current assets are what the company will own beyond a fiscal year. Non-current assets are also difficult to get converted to cash.
How to Calculate Total Assets
To calculate total assets, all the assets are listed. Any financially valuable resources owned by the organization, person, or company need to be written down. An easy place to start listing assets is with what can be converted easily, money others owe you or the company, and your existing inventory. Then determine the value of fixed assets like machinery or buildings. These assets are harder to convert to their cash value. Also, add the value of long-term investments that are being held in the form of stocks or bonds. Finally, list the value of all intangible assets such as accounts receivable, customer deposits, employment contracts, patents, etc. Finally, add all the values together to arrive at the sum of your total assets.
How do Assets Affect Accounting?
Assets are items of value like property or equipment owned or leased by a company, so they can operate. Assets can also help create value for a business. A company’s assets are important since they help generate revenue, increase the value of the business, and help the business run effectively. Assets can be sold or transferred to lower tax bills or increase efficiency, Managing assets and accounting for them is important since errors can lead to an inaccurate valuation of a business or it can lead to incorrect tax reporting. Accounting departments must record and value assets accurately to show profitability, create accurate profit and loss reporting, assure shareholders, attract visitors, and show the financial position of a business.
How do you Record Assets in Accounting?
Financial accounting considers any resource controlled or owned by a business to be an asset. Assets can be either tangible or intangible that is used to produce economic value for an entity. In accounting, the balance sheet is a monetary record of assets owned by a company. It covers assets that belong to a business or an individual. After assets are recorded on the balance sheet, the generally accepted accounting principles require additional sub-classifications of assets. Assets are usually divided into current (fixed) or non-current (long-lived). Current assets are subclassified as accruals, inventory, receivables, or cash and cash equivalents. Non-current assets are subclassified as intangible assets, plant and equipment, property, investments, and other assets.
Where is the Asset Reported?
Assets are reported on the balance sheet based on their classification. How and where assets are recorded depends on the type of asset. Some assets, accounts receivable, for example, are recorded each time there is a sale. Other assets, such as equipment or machinery, are recorded a bit differently. If you sell something to a customer and deposit it in the bank, it will increase cash assets and decrease the accounts receivable balance, which is an asset as well.
How are Assets Reported on the Balance Sheet?
A balance sheet contains assets listed in categories. Accountants list assets based on how fast the asset is expected to be sold, consumed, or turned into cash. Current assets, such as short-term investments and accounts receivable, are listed on the left-hand side of the balance sheet. Then, they are totaled. Then the fixed assets, like equipment and buildings, are listed.
An estimate of how much equipment cost has been used up is calculated based on how long the equipment is expected to be useful. This is subtracted from the fixed assets total. Finally, total the assets and record it at the bottom of the assets section.
Is it Possible to Convert an Asset Into Cash?
Yes. Cash is used universally to measure liquidity. It is the easiest way to form value which is used to purchase other assets, services, or products. Assets are classified based on how fast they can be converted to cash. Illiquid assets are not as easy to convert to cash.
Is Cash an Asset?
Yes. Cash is an asset. As a current asset, cash is recorded first on a balance sheet. Cash is the most liquid asset. It can be used to purchase other assets easily.
What is the Difference Between Assets and Liabilities?
The primary difference between assets and liabilities is that liabilities represent future financial obligations, whereas assets provide future financial benefits. One of the measures of a successful business is that its proportion of assets to liabilities is high. With more assets than liabilities, the company has a higher degree of liquidity. The aggregate difference between liabilities and assets is equity. For individuals, an asset may be their house. Their mortgage, which is a liability, offsets the asset. The difference between the house (asset) and the mortgage (liability) is how much equity the owner has in the house.