Definition of Assets:
An asset is anything with current or future economic value to a
business which includes all the resources a company owns and
controls that have a present value or have the potential to generate financial
benefits in the future.
Examples of Asset
Businesses may possess a diverse range of assets that enable them to operate at their highest potential. These assets include:
- Cash and cash equivalents
- Accounts receivable (AR)
- Marketable securities
- Trademarks
- Patents
- Product designs
- Distribution rights
- Buildings
- Land
- Mineral rights
- Equipment
- Inventory
- Software
- Computers
- Furniture and fixtures
Key Properties of an Asset
An asset has three essential properties:
- Assets signify ownership that can ultimately be converted into cash or cash
equivalents.
- Assets have economic value because that can be sold.
- Assets serve as resources that can be utilized to generate future economic
benefits.
Proper identification and
classification of asset categories are essential for a company's
survival, especially in terms of its solvency and the management of related
risks.
Assets are typically classified
in three ways:
·
Convertibility: This classification is based on how easily assets can be
converted into cash.
·
Physical Existence: Assets are classified according to their physical
nature, distinguishing between tangible and intangible assets.
·
Usage: This classification considers the purpose or function of
assets within the business operations.
Classification of Assets based on Convertibility
Based on Convertibility asset can be classified into two types: current assets and fixed assets. This can
also be referred to as short-term versus long-term assets.
1) Current Assets
The Current Assets account appears as a line item on the balance sheet
within the Assets section which includes assets that can be converted into cash within one year. Assets listed in the Current Assets
account are classified as current assets. Current assets are often referred to
as liquid assets.
- Cash
- Cash
equivalents
- Short-term
deposits
- Accounts
receivables
- Inventory
- Marketable
securities
- Office
supplies
2) Non-Current Assets or Fixed Asset
Non-current assets or Fixed Assets are those that cannot be easily or quickly converted into cash or cash equivalents. They are often referred to as long-term assets, or hard assets. Some examples are given bellow:
- Land
- Buildings
- Machinery
- Equipment
- Patents
- Trademarks
Classification of Assets Based on Physical
Existence
When assets are categorized according to their physical existence, they
are classified as either tangible assets or intangible assets.
1) Tangible assets
Assets that have a physical presence and can be
touched, felt, and seen are called Tangible Asset. Tangible assets are the primary type of assets that
companies utilize to produce their products and services. In contrast,
intangible assets are nonphysical items that hold monetary value as they
represent potential revenue. Examples of tangible assets include:
- Land
- Buildings
- Machinery
- Equipment
- Cash
- Office
supplies
- Inventory
- Marketable
securities
2) Intangible Assets
Asset which do not have physical presence but have impact on business income is called Intangible asset. Businesses
can create or acquire intangible assets. For example, a brand name is
considered an indefinite intangible asset, while a legal contract or agreement
is classified as a definite intangible asset. Examples of intangible assets
include:
- Goodwill
- Patents
- Brands
- Copyrights
- Trademarks
- Trade
secrets
- Licenses
and permits
- Corporate
intellectual property
Classification of Assets Based on Usage
Based on usage assets can be classified as Operating Asset and Non-Operating Asset.
1) Operating assets
Business utilizes Operating assets to support its
business operations and to generate revenue. Operating assets are crucial for the
daily operations of a business, as they are used to generate revenue from the
company's core activities. Examples of operating assets include:
- Cash
- Accounts
receivable
- Inventory
- Buildings
- Machinery
- Equipment
- Patents
- Copyrights
- Goodwill
2) Non-operating assets
Non-operating assets are assets that are not critical for daily business operations but can still produce revenue. Non-operating assets includes spare equipment, unused land, investment securities etc. Income from such asset is known as non operating income. Examples of non-operating assets include:
- Short-term
investments
- Marketable
securities
- Vacant
land
- Interest
income from a fixed deposit