What is an Asset?
An asset is a resource with economic value owned or controlled by an individual, corporation, or country with an expectation that it will provide future benefits. Assets are reported on a company’s balance sheet and are classified as current, fixed, financial, and intangible. They are acquired or created to enhance a firm’s value or improve its operations. In other words, an asset can be anything that generates cash flow, reduces expenses, or boosts sales, whether it’s manufacturing equipment or a patent.
Key Takeaways
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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.
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Assets are reported on a company’s balance sheet.
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They are procured or created to enhance a firm’s value or benefit its operations.
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Assets generate cash flow, reduce expenses, or improve sales, irrespective of whether they are manufacturing equipment or patents.
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Assets can be classified as current, fixed, financial, or intangible.
Understanding Assets
Assets represent economic resources owned or controlled by an entity, such as a company. An economic resource is something finite and capable of providing economic benefit through generating cash inflows or decreasing cash outflows. These resources afford exclusive access that may not be available to other individuals or firms. Ownership or access rights can be legally enforceable, meaning economic resources can be utilized at the company’s discretion.
To qualify as an asset, a company must have rights to it as of the specified financial statement date. Assets are broadly categorized into current (or short-term) assets, fixed assets, financial investments, and intangible assets.
Classifications of Assets
Current Assets
Current assets are short-term economic resources expected to be converted into cash or consumed within one year. This category includes cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses. While cash is easily valued, the recoverability of inventory and accounts receivable is reassessed periodically.
When referring to historical cost, it represents the original acquisition cost of the asset along with additional costs incurred to incorporate the asset into the company’s operations. These include delivery and setup costs.
Fixed Assets
Fixed assets are resources with a useful life extending beyond one year, such as plants, equipment, and buildings. Depreciation is an accounting adjustment made to fixed assets to allocate their cost over time. It may not correspond directly to the asset’s actual loss of earning power but distributes the asset cost periodically as per generally accepted accounting principles (GAAP).
Depreciation methods vary, with the straight-line method assuming a uniform value decrement over the asset’s useful life, while the accelerated method assumes a more significant decrease in initial years.
Financial Assets
Financial assets constitute investments in other institutions’ assets and securities. Financial assets, including stocks, bonds, and hybrid securities, are valued based on underlying security, market supply, and demand.
Intangible Assets
Intangible assets, such as patents, trademarks, and goodwill, lack physical presence but contribute economic value. These assets are either amortized or assessed for impairment annually to reflect their economic worth appropriately.
What Is Considered an Asset?
An asset is anything offering a current, future, or potential economic benefit for an individual or company. It can either be owned by you or be owed to you. Examples include cash, vehicles, computer equipment, and loans extended to others, the latter representing a financial asset.
What Are Examples of Assets?
Personal assets encompass homes, land, financial securities, jewelry, and checking accounts. Business assets encompass motor vehicles, real estate, machinery, equipment, cash, and accounts receivable. These assets directly contribute to personal wealth or business operations.
What Are Non-Physical Assets?
Non-physical or intangible assets offer economic benefits without physical presence. Essential examples include intellectual properties like patents or trademarks, contractual obligations, royalties, and goodwill. Brand equity and reputational value, although intangible, can significantly enhance a company’s worth.
Is Labor an Asset?
Labor, carried out by human beings in exchange for wages or salaries, is distinct from assets. It is grouped under expenses as opposed to being viewed as capital or an asset.
How Are Current Assets Different From Fixed Assets?
In accounting, assets are distinguished by their temporal usability. Current assets are sold or used within one year, while fixed (non-current) assets span over a year. Unlike easily liquidifiable current assets, fixed assets experience depreciation due to their prolonged use.
Related Terms: liabilities, capital, economic benefit, depreciation, amortization.
References
- Internal Revenue Service. “Publication 946 (2021), How to Depreciate Property”.
- Internal Revenue Service. “Intangibles”.
