“Assets bring money in your pockets, while liabilities take money out of your pocket.”
Assets are essential for defining the personal portfolio of an individual as well as of an organization. Assets are defined as the rights owned by the company or the individual. Many times, economists term asset as the opposite of liability.
In this blog we will understand about assets, types of assets, working and its difference from the liability.
What is an Asset?
The accounting diary of every business or organization mainly consists of two terms: assets and liability. Later all other aspects and terms of accounting depend and derived from these two. Assets are an important part of accounting.
An asset is defined as a resource having a particular economic value. It is the amount that an individual, organization or a country owns. With this amount or property, the holder expects a future.
Assets are mentioned on the one side of the balance sheet as they are thought to increase a firm’s benefit and value in its operations. Anything that is expected to generate cash flow in future is counted as an asset. An asset can also be responsible for reducing expenses and improving sales.
In simple words, an asset in financial accounting is any resource owned by a business or individual entity having any economic value. Every asset is responsible for creating a positive economic influence to the holders.
Assets can be converted into cash, and it includes money and other valuables involved in a business. Broadly assets are classified into two major categories, tangible assets and intangible assets. These two are further classified into sub categories like current assets, fixed assets and non-physical resources.
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Characteristics of Assets
The characteristics of assets are as follows:
An asset can be any source that provides current, future, or potential economic benefit.
Asset can be something that is owned by you or something that is owed to you.
Loan is counted as both asset and liability.
Assets have a property; it can be turned into cash or cash equivalent.
Asset has some economic value and can be sold or exchanged.
Any form that can be held for financial benefits is classified as an asset.
Asset is a present right.
Asset is a right to an economic benefit.
In financial accounting, assets do not always carry a title.
Assets can be recognized as long as the reporting asset controls the right.
Control prevents the other parties from directly using the asset or any other economic source.
The last two characteristics and their combination allows the individual to obtain the economic benefit. The accounting term defines assets that are not possessed by the organizations and it generally excludes the employee.
How does an Asset Work?
An asset is something defined as an economic resource for the organization. An asset of a company is legally enforceable. For an asset to work, the company must possess a right of the financial statement.
Clearing the meaning of economic resources. Anything that has an ability to build an economic benefit by increasing cash inflows and preventing cash outflow is defined as an economic resource. Individuals can buy and sell the assets as per the need. Companies generally sell the assets when their value is losing.
Companies own the assets in the terms of doing business. While running a business if the company purchases another business, it also becomes an asset.
Unlike liability which can be short-term as well as long-term, assets are generally long-term in value. In the history of businesses, it has been seen that sooner or later companies sell or fold assets at great loss.
There are different ways by which you can trade assets, buy or sell them. For example, let us consider a day-to-day case, if you want to own a car where to go, yeah, brand franchise, and for selling your old one, you will register at olx or some relevant site. This is the common example of trading your assets, business has a bit of a complicated process.
The historical cost principle states that assets are recorded on the books. They are noted at the price that the company had paid for them. Almost all assets are adjusted to fair market value.
Some of these assets are not adjusted and are purchased indirectly. Businesses are rated as per the value of their asset ownership. This is so because economic resources help in generating revenues.
Every economic resource has some value. The value depends on the nature of the asset and the way by which it is acquired. If you want to calculate the exact value of your business, you can simply do that by reducing the outstanding loans from the sum of all the assets. This will help to know the actual value the company owns.
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Different Types of Assets
Depending upon the characteristics, businesses and organizations classify assets into two major categories.
Types of assets
Tangible assets refer to the physical form of economic resources. These are further classified into current and non-current events and are very easy to estimate. While intangible or intangible assets lack physical nature and are hard to calculate or estimate.
Tangible assets are the assets that have a physical nature. The examples of tangible assets are vehicles, precious metals, currencies, buildings, real estate, crops, industrial metals, and rare-earth metals. As the name suggests, tangible assets' value keep deteriorating over time.
For tangible assets, managers use deterioration modeling to predict the future target of assets. Depreciation is applicable to tangible assets as their value decreases day to day. Depreciation is used to allocate the whole tangible asset rather than calculating the entire expense.
Examples of tangible assets include art, furniture, stamps, wine, toys, books, gold and silver. Many people count tangible assets to define their asset portfolio. Tangible assets are further classified into current assets and noncurrent assets:
1. Current Assets
Current assets are temporary assets. In other words, they have huge liquidity. They can be easily converted into cash or cash equivalents. Therefore, current assets are also known as liquid assets.
For example, cash, short-term deposits, accounts receivable, inventory and marketable securities.
Cash or cash equivalents: Cash can be defined as any possession owned by the business. It can be cash, money or treasure bills. These kinds of assets are used to purchase other resources or for other transactions.
Accounts receivable: Accounts receivable is the money that the company is about to receive in future. Sometimes, the businesses allow the customers to purchase on installments, that right is counted as accounts receivable.
Inventory: Inventory is defined as the merchandise of the company. It is the asset that a company wants to sell for a profit. It can be purchased by any organization or individual.
Investments: Investment is also counted as an asset. In general, it contains stocks and bonds.
2. Non-Current Assets
Non-current assets are also known as long term assets or fixed assets. Fixed assets are not liquidated. That means they can’t be accessed as easily as the current assets and are thus called hard assets. In other words, non-current assets can’t be converted into cash or cash equivalents. For example, land, building, patents, machinery, and trademarks.
- Land: Land is considered as a long-term asset as it will not be consumed in the current period. Also, it is not used over time.
- Buildings: Buildings can be anything from a production house to a warehouse. Many organizations stay in the same building for long. Thus, it is called a long-term resource.
- Patents: Patents one approved stay for the whole life of a product or a technology, whatever it may concern to.
- Equipment: Equipment and machinery are used for manufacturing and production. It has a more useful life for more than one year, thus, called long-term or non-current assets.
Intangible assets are the assets that have no physical presence, still the organizations have rights on it, for example, copyrights and goodwill. The accounting depends on the type of asset and their characteristics. It can be either amortized or tested for impairment each year.
Intangible assets include the examples of intellectual property of the company. Intangible assets help the company to generate revenue from time to time. Most valuable assets of all the assets are intangible in nature.
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Difference between Personal Assets and Business Assets
Sometimes, people confuse business assets with intangible or intangible assets. Though business assets can be intangible sometimes, not every intangible asset is a business asset. The business asset is generally differentiated by personal assets.
Personal assets are generally defined as the rights and valuable things that are owned by the individual or household. Some of these assets can have present or future value. The major examples of personal assets are as follows:
Cash and cash equivalents.
Money market account
Physical money or treasury money and bills
Land, property and building
Personal property including vehicles, jewelry, furniture, and other household collectible
Investments and bonds
Mutual funds and stocks.
Business assets are defined as the assets owned by a business or a corporation. Businesses define assets as the things that can sustain their production and progress. Generally, business assets include machines, property, raw materials, patents, royalties and inventory.
The assets of a company are mentioned in the balance sheet of the company. It also mentions the way by which those assets are financed. It can be done either by issuing debt or by equity.
Further business assets are classified into two types, current assets and noncurrent assets. For example, Cash and cash equivalents, Marketable securities, Inventory, Amount receivable, Buildings and equipment, resources etc.
In simple language, assets are something that is owned by you and liabilities are something you owe to others. Assets are your rights that bring money in your pockets while liabilities are something that takes out money from your pocket.
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For calculating assets, you can subtract the total liabilities from the assets. Assets are essential to define the personal portfolio of the individual. Thus, one should always maintain and update about it