What Is an Asset?
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.
Assets are reported on a company's balance sheet. They're classified as current, fixed, financial, and intangible. They are bought or created to increase a firm's value or benefit the firm's operations.
An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it's manufacturing equipment or a patent.
Key Takeaways
- An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.
- Assets are reported on a company's balance sheet.
- They are bought or created to increase a firm's value or benefit the firm's operations.
- An asset is something that may generate cash flow, reduce expenses or improve sales, regardless of whether it's manufacturing equipment or a patent.
- Assets can be classified as current, fixed, financial, or intangible.
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Understanding Assets
An asset represents an economic resource owned or controlled by, for example, a company. An economic resource is something that may be scarce and has the ability to produce economic benefit by generating cash inflows or decreasing cash outflows.
An asset can also representaccess that other individuals or firms do not have. Furthermore, a right or other type of access can be legally enforceable, which meanseconomic resources can be used at a company's discretion. Their use can be precluded or limited by an owner.
For something to be considered an asset, a company must possess a right to it as of the date of the company's financial statements.
Assets can be broadly categorized into current (or short-term) assets, fixed assets, financial investments, and intangible assets.
Types of Assets
Current Assets
In accounting, some assets are referred to as current. Current assets are short-term economic resources that are expected to be converted into cash or consumed within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses.
While cash is easy to value, accountants periodically reassess the recoverability of inventory and accounts receivable. If there is evidence that a receivable might be uncollectible, it'll be classified asimpaired. Or if inventory becomes obsolete, companies may write off these assets.
Some assets are recorded on companies' balance sheets using the concept of historical cost. Historical cost represents the original cost of the asset when purchased by a company. Historical cost can also include costs (such as delivery and set up) incurred to incorporate an asset into the company's operations.
Fixed Assets
Fixed assets are resources with an expected life of greater than a year, such as plants, equipment, and buildings. An accounting adjustment called depreciation is made for fixed assets as they age. It allocates the cost of the asset over time. Depreciation may or may not reflect the fixed asset's loss of earning power.
Generally accepted accounting principles (GAAP) allow depreciation under several methods. The straight-line method assumes that a fixed asset loses its value in proportion to its useful life, while the accelerated methodassumes that the asset loses its value faster in its first years of use.
Financial Assets
Financial assetsrepresent investments in the assets and securities of other institutions. Financial assets include stocks, sovereign and corporate bonds, preferred equity, and other, hybrid securities. Financial assets are valued according to the underlying security and market supply and demand.
Intangible Assets
Intangible assets are economic resources that have no physical presence. They include patents, trademarks, copyrights, and goodwill. Accounting for intangible assets differs depending on the type of asset. They can be either amortized or tested for impairment each year.
While an asset is something with economic value that's owned or controlled by a person or company, a liability is something that is owed by a person or company. A liability could be a loan, taxes payable, or accounts payable.
What Is Considered an Asset?
When looking at an asset definition, you'll typically find that it is something that provides a current, future, or potential economic benefit for an individual or company. An asset is, therefore, something that is owned by you or something that is owed to you. A $10 bill, a desktop computer, a chair, and a car are all assets. If you loaned money to someone, that loan is also an asset because you are owed that amount. For the person who owes it, the loan is a liability.
What Are Examples of Assets?
Personal assets can include a home, land, financial securities, jewelry, artwork, gold and silver, or your checking account. Business assets can include such things as motor vehicles, buildings, machinery, equipment, cash, and accounts receivable.
What Are Non-Physical Assets?
Non-physical or intangible assets provide an economic benefit even though you cannot physically touch them. They are an important class of assets that include things like intellectual property (e.g., patents or trademarks), contractual obligations, royalties, and goodwill. Brand equity and reputation are also examples of non-physical or intangible assets that can be quite valuable.
Is Labor an Asset?
No. Labor is the work carried out by human beings, for which they are paid in wages or a salary. Labor is distinct from assets, which are considered to be capital.
How Are Current Assets Different From Fixed (Noncurrent) Assets?
In accounting, assets are categorized by their time horizon of use. Current assets are expected to be sold or used within one year. Fixed assets, also known asnoncurrent assets, are expected to be in use for longer than one year. Fixed assets are not easily liquidated. As a result, unlike current assets, fixed assets undergodepreciation.
