What is an Asset and how is it classified?
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet. They're classified as current, fixed, financial, and intangible.
What are the key properties of assets?
There are three key properties of assets:
- Ownership: Represent ownership that can be eventually turned into cash and cash equivalents
- Economic Value: Have economic value and can be exchanged or sold
- Resource: Are resources that can be used to generate future economic benefits
How is it Classified?
They are generally classified in three ways:
1) Convertibility
Classifying them based on how easy it is to convert them into cash.
Assets are classified as either current assets or fixed assets based on how easily they can be converted into cash. An alternative expression of this concept is short-term vs. long-term assets.
1.1) Current Assets
Current assets are assets that a company can easily convert into cash and cash equivalents, typically within a year. Current assets also refer to liquid assets, and examples of these include:
- Cash
- Cash equivalents
- Short-term deposits
- Accounts receivables
- Inventory
- Marketable securities
- Office supplies
1.2) Fixed or Non-Current Assets
Non-current assets are assets that cannot be easily and readily converted into cash and cash equivalents. Non-current assets also go by the terms fixed assets, long-term assets, or hard assets. Examples of non-current or fixed assets include:
- Land
- Building
- Machinery
- Equipment
- Patents
- Trademarks
2) Physical Existence
Classifying them based on their physical existence (in other words, tangible vs. intangible assets).
Assets classify based on their physical existence as either tangible assets or intangible assets.
2.1) Tangible Assets
Tangible assets are physical assets that can be touched, seen, and felt. Examples of tangible assets include:
- Land
- Building
- Machinery
- Equipment
- Cash
- Office supplies
- Inventory
- Marketable securities
2.2) Intangible Assets
Intangible assets are assets that lack physical existence. Examples of intangible assets include:
- Goodwill
- Patents
- Brand
- Copyrights
- Trademarks
- Trade secrets
- Licenses and permits
- Corporate intellectual property
3) Usage
Classifying them based on their business operation usage/purpose.
Assets are classified as either operating or non-operating based on their usage or purpose.
3.1) Operating Assets
Operating assets are assets that a business requires for its daily operation. In other words, a company uses operating assets to generate revenue from its core business activities. Examples of operating assets include:
- Cash
- Accounts receivable
- Inventory
- Building
- Machinery
- Equipment
- Patents
- Copyrights
- Goodwill
3.2) Non-Operating Assets
Non-operating assets are assets that businesses do not need for daily operations but can still generate revenue. Examples of non-operating assets include:
- Short-term investments
- Marketable securities
- Vacant land
- Interest income from a fixed deposit
Business assets include:
- PPE Property plant and equipment
- Cash and cash equivalents
- Accounts receivable
- Inventory and Stock
- Intangibles ie. trademarks, intellectual property, patents and copyrights
- Financial ie. Short and Longterm investments
Assets are used by the entity to produce income and wealth for the business. Assets can be non-current or current asset depending on the term over which the asset will be used or depreciated. (Non-current = longer than 12 months) (Current = in the next 12 months)
Frequently asked questions
What are assets vs liabilities?
Assets refer to items that increase the total worth of your business. These can be cash, physical assets such as machinery, or non-physical ones like your company's standing in the community.
Liabilities, on the other hand, represent what your business owes to external parties, such as investors or financial institutions that have granted your company a loan.
Is a car an asset?
Your car is considered a consumer product, and consumer products can depreciate. A car is a depreciating asset that loses value over time but retains some worth. Because you can convert a vehicle to cash, it can be defined as an asset.
Is a bank an asset or expense?
A bank account may be an asset or a liability to the bank. For example, if the account incurs fees paid to the bank, it would be an asset, but if it is a savings account that accrues interest, then it would be a liability since the bank would owe this interest.
Is income an asset?
People generally do not consider income an asset, but it can become one if they invest it in assets that generate additional income. You can consider income as patrimony when you use it to pay off debts, reduce liabilities, or finance a business venture. Assets are resources that have monetary value and can be easily converted into cash.
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