What is a Business Asset?
A business asset is an item of value owned by a company. Business assets span many categories. They can be physical, such as vehicles, real estate, computers, office furniture, and other fixtures, or intangible items, such as intellectual property.
Key Takeaways
- A piece of property or equipment purchased for business use: Business assets include not only physical items but also intangible entities like intellectual property.
- Listed on the balance sheet and valued: They are itemized and displayed at historical cost in the company’s annual report, showcased in order of liquidity.
- Tax benefits through depreciation or expense under Section 179: Most assets can be written off either as a large immediate expense or depreciated over time.
- Divided into current and non-current sections: Assets are categorized based on their expected conversion to cash within a year or more than a year.
- Valuable through professional appraisal: The worth of business assets can be determined by an appraiser if needed.
Understanding Business Assets
Business assets are itemized and valued on the balance sheet, which can be found in the company’s annual report. They are listed at historical cost rather than market value, and they appear on the balance sheet as items of ownership. Most business assets can be written off or taken as an expense on the income statement either as one large expense in the year of purchase or by being depreciated, which is the process of spreading the cost of an asset over time. Some large, expensive assets qualify to be expensed entirely in the year of purchase under Section 179. Assets are listed in the order of liquidity, indicating their ease of being quickly bought or sold in the market without affecting their price.
The Pivotal Role of Business Asset Accounting
Business asset accounting is perhaps one of the most crucial responsibilities of company management. Investors use a financial ratio known as Return on Net Assets (RONA) to gauge how effectively companies utilize their assets.
Special Considerations
Current Assets vs. Non-Current Assets
Business assets are divided into two sections on the balance sheet: current assets and non-current assets. Current assets are business assets that will be turned into cash within one year, such as marketable securities, cash, inventory, and receivables (debts owed to a company by its customers for goods or services that have been delivered or used but not yet paid for). Non-current or long-term assets are less liquid assets expected to provide value for more than one year. These are generally referred to as capitalized assets since their cost is capitalized and expensed over the life of the asset in a process known as depreciation. This includes items such as property, buildings, and equipment.
Depreciation and Amortization of Business Assets
Tangible or physical business assets are depreciated, while intangible business assets are amortized, which is the process of spreading the cost of an intangible asset over its useful life. When businesses amortize and depreciate expenses, they align an asset’s costs with the revenues it generates. For example, depreciation is calculated by subtracting the asset’s salvage value or resale value from its original cost. The difference is divided by the useful life of the asset. If a truck has a useful life of 10 years, costs $100,000, and has a salvage value of $10,000, the annual depreciation expense is $9,000.
Valuing Business Assets
The value of business assets varies and can change over time. Many current, tangible assets, such as vehicles, computers, and machinery, tend to age, and some may become obsolete as newer, more efficient technologies are introduced. Companies can spend money to acquire new assets or improve existing ones through capital addition, which is recorded as capital expenditures (CapEx) on the balance sheet. Additionally, businesses may seek to value assets through appraisers for purposes such as collateral or substantiating depreciation deductions.
Related Terms: capital expenditures, cash flow, financial reporting, investment, asset management.
