What is an Asset?
An asset is anything of value or a resource of value that can be converted into cash. Individuals, companies, and governments own assets. For a company, an asset might generate revenue, or a company might benefit in some way from owning or using the asset.
Examples of personal assets include:
- Cash and cash equivalents, certificates of deposit, checking, and savings accounts, money market accounts, physical cash, Treasury bills
- Property or land and any structure that is permanently attached to it
- Personal property – boats, collectibles, household furnishings, jewelry, vehicles
- Investments – annuities, bonds, the cash value of life insurance policies, mutual funds, pensions, retirement plans, (IRA, 401(k), 403(b), etc.) stocks
Your net worth is calculated by subtracting your liabilities from your assets. Essentially, your assets are everything you own, and your liabilities are everything you owe. A positive net worth indicates that your assets are greater in value than your liabilities; a negative net worth signifies that your liabilities exceed your assets.
The balance sheet lists a company’s assets and shows how those assets are financed, whether through debt or through issuing equity. The balance sheet provides a snapshot of how well a company’s management is using its resources. There are two types of assets on a typical balance sheet.
Current assets are assets that can be converted into cash within one fiscal year or one operating cycle. Current assets are used to facilitate day-to-day operational expenses and investments.
Current Assets Include:
- Cash and cash equivalents: Treasury bills, certificates of deposit, and cash
- Marketable securities: debt securities or equity that is liquid
- Accounts receivables: money owed by customers to be paid in the short-term
- Inventory: goods available for sale or raw materials
Fixed assets are non-current assets that a company uses in its production of goods, and services that have a life of more than one year. Fixed assets are recorded on the balance sheet and listed as property, plant, and equipment (PP&E). Fixed assets are long-term assets and are referred to as tangible assets, meaning they can be physically touched.
Examples of fixed assets include:
- Vehicles (such as company trucks)
- Office Furniture
The two key differences with business assets are non-current assets (like fixed assets) cannot be converted readily to cash to meet short-term operational expenses or investments. Conversely, current assets are expected to be liquidated within one fiscal year or one operating cycle.
Types of assets
The two main types of assets are current assets and non-current assets. These classifications are used to aggregate assets into different blocks on the balance sheet so that one can discern the relative liquidity of the assets of an organization.
Current assets are expected to be consumed within one year, and commonly include the following line items:
Cash and cash equivalents
Non-current assets are also known as long-term assets and are expected to continue to be productive for a business for more than one year. The line items usually included in this classification are:
Tangible fixed assets (such as buildings, equipment, furniture, land, and vehicles)
Intangible fixed assets (such as patents, copyrights, and trademarks)
The classifications used to define assets change when viewed from an investment perspective. In this situation, there are growth assets and defensive assets. These types are used to differentiate between the manner in which investment income is generated from different types of assets.
Growth assets generate income for the holder from rents, appreciation in value, or dividends. The values of these assets can rise in value to generate a return for the holder, but there is a risk that their valuations can also decline. Examples of growth assets are:
Defensive assets generate income for the holder primarily from interest. The values of these assets tend to hold steady or can decline after the effects of inflation are considered, and so tend to be a more conservative form of investment. Examples of defensive assets are:
Certificates of deposit
Assets may also be classified as tangible or intangible assets. Intangible assets lack physical substance, while tangible assets have the reverse characteristic. Most of an organization’s assets are usually classified as tangible assets. Examples of intangible assets are copyrights, patents, and trademarks. Examples of tangible assets are vehicles, buildings, and inventory.
Different Type of Asset
Fixed assets are long-term assets. These are assets which are purchased for use over a long period of time (generally more than one year). For example, land and building, plant and machinery, etc.
Current assets are assets which are expected to be converted to cash within a year. For example, Debtors. Debtors are the customers to whom we have sold the goods on credit. Generally, the amount receivable from debtors is received within a year’s time.
Liquid assets include cash and all other assets which can be converted into cash at very short notice. For example, cash in hand, cash at bank, shares, etc.
These are assets which have a physical existence. We can touch, see or feel these assets. For example, plant and machinery.
These are the assets which do not have any physical existence. For example, Goodwill (Goodwill is the reputation of the firm expressed in terms of money).
As the name suggests, these are not assets in a true sense. These generally include some one time heavy expenses which are not considered as an expense only in the year in which they were incurred.
Rather, these expenses are shown as expenses over a few accounting years. If the entire amount of these expenses is considered as an expense in the year of occurrence, these expenses may result in a big loss in that particular year.
For example, preliminary expenses. If the entire amount of preliminary expenses is assigned to the first year only, it would result in a huge loss in the first year itself.
So instead of treating the entire amount of preliminary expenses as an expense of the first year, these expenses would be spread out over a few accounting years.
For example, say preliminary expenses are Rs.100/-. So what the firm may do is spread it over a period of say 5 years. So in the first year, only Rs.20/- (Rs.100 divided by 5) would be considered as preliminary expenses and balance Rs.80/- would be shown as an asset (fictitious asset) in the first year.
During the second year, again Rs.20/- will be considered as preliminary expenses and balance Rs.60/- would be shown as an asset (fictitious) in the second year, so on and so forth.
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