What is an Asset? Definition, Types, and Examples
In our day-to-day life, we very often refer to many things as an asset, and this is because it’s a very generalized term. But in terms of business and accounts, an asset has a specific meaning which is further categorized into several parts. Usually, an organization describes an Asset as something that holds an economic value and can turn profitable for the organization in the future.
What is an Asset?
An asset can be defined as an important resource that an individual, company, or nation holds which has an economic value, that can generate profit in the future. An asset is always good to have as you can hold it for a long to earn profit in the future and can also sell it for cash when required. A company requires assets to increase its profit, improve sales, and reduce expenses. Also, the asset is one of the factors that many lenders such as banks look upon before sanctioning a loan.
What is the Classification of Assets?
In a company, assets are classified mainly under three categories, convertibility, physical existence, and usage.
Convertibility: It shows how easily an asset can be liquidated into cash.
Physical existence: It shows whether an asset is tangible or intangible.
Usage: It further categorizes the available assets, based on their usage.
Importance of Asset Classification
It’s quite important to classify assets in a company, as it provides a clear picture of the cash flow, and inventory available with the company. It helps management to check the company’s eligibility and limit of loans that can be lent based on the company’s assets.
How do Assets Work?
Assets work as important financial resources to a company, it has an economic value when they are in use and even after they are used. For example, a company’s land, equipment, and machines help the company in making a profit, and even when you sell it, you receive a pretty decent value for it. Assets are mainly categorized mainly based on how easily they can be exchanged for cash. It also helps accountants in preparing the balance sheet of a company, and also lenders such as banks, get an idea about available assets within the company, to decide whether a loan can be granted to that company or not.
What are the 3 key Properties of Assets?
Any asset that a company holds has 3 key properties and that are:
- Economic Value: An asset possesses a certain economic value for which it can be sold.
- Ownership: Assets can be exchanged for cash and resemble ownership as well.
- Resources: Assets are also often referred to as resources of a company as they can generate future economic benefits for a company.
Types of an Asset
Assets are classified into 4 main types, i.e. current, intangible, fixed, and financial assets.
Current assets are also often referred to as short-term assets in accounting terms, as current assets are held by a company for a short period (1 year) which is then converted into cash. The current assets of a company include cash reserves, inventory, prepaid expenses, accounts receivable, etc.
Intangible assets are some of the assets, that do not have a physical presence but are still quite valuable for a company. Some of the intangible assets that the company holds are its copyrights, patents, trademark, and goodwill in the market.
A fixed asset is a long-term asset, that holds for many years (more than a year). These fixed assets include factories, plants, business offices, equipment, machines, etc. However in accounting, the value of his assets tends to fall with time due to depreciation, however, the cost of land on which these fixed assets are installed tends to increase with time.
Financial assets refer to the investment made in the stocks of other companies, bank investments, preferred equity, corporate and sovereign bonds, etc. The actual value of financial assets is not fixed as it varies with the ups and downs of the market.
Assets Vs Liability
Assets are the company’s resources that a company owns, and have economic value, while on the other hand, liability is what a company owes others, especially money for example payment towards bank loans, outstanding bills of suppliers, employee wages, etc. All the assets and liabilities of a company are listed on its balance sheet.
What is Considered an Asset?
In a generalized way, an asset would be anything that has the potential to benefit a business or an individual financially at present or in the future. From cash in your pocket to your laptops, company vans, and furniture used in business all fall under assets. Also if a company or an individual has lent a certain amount to someone then that amount is also counted as an asset. Apart from this, the company’s other investments such as sovereign bonds, corporate bonds, holdings in other companies, and bank investments all are considered an asset.
What are Non-Physical Assets?
A non-physical asset or also often referred to as an intangible asset is an asset that a company holds, but is not physically available. Similar to other physical assets, these assets also have equal importance and it includes the company’s trademark, patents, copyrights, royalties, and obligations. The company’s reputation, goodwill, and brand equity are other examples of the company’s non-physical assets. However, these assets are not bought with the aim to be sold off as it’s necessary for a company’s operation.
Examples of an Assets
Assets can be either personal or a company’s, and personal assets mainly include home, bank investments, lands, precious jewelry, gems, metals, artworks, etc. However on the other hand a company’s asset includes trademarks, patents, market securities, distribution rights, factories, offices, software, equipment, machines, land, etc.
What is the Role of Assets in Accounting?
In accounting, while preparing a financial statement or a business strategy, the proper valuation of assets is quite important. It’s important to understand a company’s cash flow and market capital while evaluating the assets of a company. A proper calculation of all the liabilities and taxes is also equally important as the assets and liabilities both appear on the balance sheet of a company. The proper evaluation of the company’s available assets helps its management to focus on its utilization for the company’s growth. Also, it helps other lenders such as banks and other financial institutions to determine a company’s financial position before sanctioning a loan.
Since a company’s assets are one of its most valuable financial resources, effective asset management is critical to its success. Also, the value of assets in the company should always be higher than the liabilities for the continued profitable growth of the company. Thus the management of the company needs to look for available assets on the balance sheet and make proper use of them for the growth of the company.
FAQ on Asset
Q1. Does Labor Count as an Asset?
Ans: Labors are not counted as an asset, as it’s an expense to the company i.e. to be paid by the company at the end of the month.
Q2. What is a Fixed Asset in Accounting?
Ans: A fixed asset in accounting is a long-term asset, through which the company is planning to earn a profit, and that asset is not going to be sold by the company in a year.
Q3. What Qualifies as an Asset?
Ans: Anything that an individual or company owns, which has a financial value qualifies as an asset.
Q4. What is the difference between a Current and Fixed Asset?
Ans: A current asset is going to be used or sold off by a company within a year, while on the other hand, a fixed asset is one that a company retains for a long term, usually for more than a year.
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