Upon hearing the word “assets,” the first thing that comes to mind is usually something valuable, such as land, houses, vehicles, and so on. However, in essence, assets are defined as any valuable resources that can be converted into cash and hold potential benefits in the future. The ownership of assets can be attributed to individuals, companies, or the government.
Personal assets refer to valuable possessions owned by an individual or a household. These assets can take various forms, including deposits, current and savings accounts, money market accounts, physical cash, land, and any structures permanently attached to them. Additionally, personal assets encompass private properties like boats, collectibles, furniture, jewelry, and vehicles, as well as various types of investments such as annuities, bonds, life insurance policies, mutual funds, and stocks.
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Types of assets (source: freepik)
For businesses, assets are valuable resources that contribute to the production and growth of the company. In a business context, assets encompass various items, including machinery, properties, raw materials, inventories, and intangible assets like patents, royalties, and intellectual property. It is important for company assets to generate income or provide other forms of benefits.
The company’s balance sheet provides insight into the financing structure of each asset, whether it is through loans or equity issuance. Additionally, the balance sheet reflects the company’s management’s effectiveness in utilizing its available resources. In a typical balance sheet, assets are categorized into two types.
Assets play a crucial role in calculating net worth. The most straightforward method to assess an individual’s or a company’s net worth is by totaling the value of all owned assets and subtracting any liabilities. Furthermore, when evaluating a loan application, lenders often take into account the amount of current assets. In addition, asset owners have the option to use their assets as collateral when necessary.
Hence, it is vital to maintain a comprehensive record of assets as a fundamental aspect of managing a business. Similarly, individuals and institutions should prioritize conducting regular asset inventories. Furthermore, understanding the quantity and value of owned assets is crucial for ensuring adequate protection for ourselves or our business. Two common approaches to determining the value of an asset include the cost method and the market value method.
The cost method represents a straightforward approach to assessing asset value, relying on the actual purchase price. In contrast, the market value method, also known as the mark-to-market method, offers a more accurate means of determining asset value as it considers fluctuations that may cause the value to be higher or lower than the purchase price. This method reflects the current market value of the asset.
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Types of Assets
Business assets (source: Freepik)
Business assets can be categorized into three distinct categories: convertibility, physical existence, and function.
Convertibility
Convertibility refers to the ease with which an asset can be converted into cash or other forms of value. There are two types of assets based on their exchangeability.
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Current asset
Current assets are valuable resources that can be easily converted into cash or used up within a year or one operational cycle. These assets play a crucial role in funding a company’s day-to-day operations and short-term investments. Examples of current assets include cash, cash equivalents (such as bonds, certificates of deposit, and liquid equity), short-term debt, and inventories.
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Fixed asset
A fixed asset, also known as a tangible fixed asset or property, plant, and equipment (PP&E), is a long-term asset acquired to support business operations for more than one year. Unlike current assets, fixed assets cannot be easily converted into cash to cover operational costs or short-term investments. These assets have a physical form and are recorded on the balance sheet. Examples of fixed assets include land, buildings, vehicles, boats, airplanes, machinery, computer hardware, cell phones, and other tools or equipment.
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Physical Existence
Assets can be categorized into two types based on their physical existence: tangible assets and intangible assets.
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Tangible asset
Tangible assets are physical assets that have a physical form and can be seen and touched. These assets have a measurable value and include items such as land, buildings, vehicles, equipment, inventory, and machinery.
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Intangible asset
Intangible assets, as the name suggests, lack physical form. They encompass assets such as brand names, distribution chains, patents, proprietary processes and methodologies, and copyrights.
Current assets and fixed assets typically fall under the category of tangible assets. However, the classification of intangible assets on the balance sheet depends on the nature of the business. If an intangible asset is deemed essential to the business, it may be recorded.
The process of classifying assets as tangible or intangible is not always straightforward. Companies must adhere to specific rules, such as special accounting rules for industries like oil and gas. For instance, petroleum reserves may be classified as tangible or intangible based on their stage of development.
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Function
Assets can be further classified based on their function into two categories: operating assets and non-operating assets.
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Operating asset
These are assets that are essential for the day-to-day operations of a company. They directly contribute to the company’s revenue generation and core business activities. Examples of operating assets include cash, inventories, buildings, machinery, tools, copyrights, and patents.
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Non-operating asset
A non-operating asset refers to an asset that has the potential to generate income for a business but is not essential for its day-to-day operations. These assets are typically not directly involved in the core revenue-generating activities of the business.
Examples of non-operating assets include short-term investments, such as stocks and bonds; properties or real estate that are not used for business operations; land held for investment purposes; and income generated from interest or dividends.
That concludes the discussion on assets and their various types. It is our hope that this article has provided valuable insights and enhanced understanding regarding the importance of accurate asset classification for businesses. Properly classifying assets allows businesses to effectively manage their resources, make informed financial decisions, and maintain a clear overview of their financial health.
