What are Assets?
Assets are items that you own and may exchange for money. An asset is anything that a company owns or manages in accounting. It includes anything that can be traded for money. The examination of a balance sheet and its assets and liabilities assists us in determining its equity value. This value can be used to determine if a firm is overpriced or undervalued in the market.
Features of Assets
1. Ownership: Assets indicate the control or ownership by the company for production purposes. The corporation can exchange these assets for cash or cash equivalents.
2. Expected Usable Life: An asset has a predetermined period of time during which it can be used productively. For objects such as machinery that are required for the manufacture of goods, the estimated life is known to either the seller (who sells the asset to the company) or a competent professional (who determines the life span based on the asset’s current condition and estimated usage).
3. Scrap Value: The depreciation of an asset over a period of time due to degradation or obsolescence. After a couple of years, the asset is no longer functioning or useful to the firm. However, it continues to have some salvage value that the corporation can profit from by reselling it to a scrap dealer. This is referred to as an asset’s scrap value. The scrap value obtained by transferring the asset is an additional form of revenue for the company.
4. Maintenance Cost: Maintenance or repair costs are incurred by the majority of assets. Regular maintenance ensures that the asset runs properly and does not disrupt business activities. When an asset fails, whether temporarily or permanently, the organisation suffers significant revenue losses.
4. Economic Worth: Every asset has an economic worth, which can be traded or sold in the market.
Total Assets = Current Assets + Noncurrent Assets
Here,
1. Current Assets = Cash and Cash Equivalents + Accounts Receivables + Marketable Securities + Inventory + Prepaid expenses + Other Liquid Assets
2. Non-current Assets = Fixed Assets (Tangible + Intangible) + Non-current Investments + Long-term Loans and Advances
Types of Assets
Assets are classified into many groups depending on specified criteria. These are their names:
1. Convertible into Cash
When categorising assets according to their financial convertibility, assets are categorised as either current assets or fixed assets. This concept can also be expressed as the contrast between short-term and long-term assets.
A. Current Assets: Current assets are those that are readily convertible into cash or cash equivalents, usually within a period of one year. They are sometimes referred to as liquid assets. e.g Cash, Short-term deposits, Inventory, Marketable securities, Accounts receivables, Cash equivalents and Office supplies.
B. Fixed or Non-Current Assets: Noncurrent assets are those that are not readily convertible into cash or cash equivalents on a short-term basis. Hard assets, long-term assets, and fixed assets are alternative names for noncurrent assets. The following are instances of noncurrent or fixed assets:Land, Trademarks, Building, Equipment, Machinery and Patents.
2. Tangible Existence
This criterion categorises assets as either physical or intangible. Tangible assets have a physical shape and can be used as collateral for company loans. Tangible assets include land, machinery, buildings, and equipment, among other things. Intangible assets, on the other hand, do not have a physical form but can create money for the business. Intangible Assets include things like goodwill, copyright, trademarks, patents, licences, and permissions.
A. Physical Assets : Physical assets are tangible assets; they are objects that can be seen, touched, and felt. Instances of tangible assets consist of: Land, Machinery, Equipment, Office supplies, Cash, Building, Inventory, Marketable securities etc.
B. Intangible Assets : Intangible assets are those which do not have a tangible form. The following are examples of intangible assets: Goodwill, Brand, Patents, Trademarks, Copyrights, Trade secrets.
3. Usage
This category classifies assets as either operating or non-operating. Operating assets are assets that a company requires for the normal functioning of their business in order to produce revenue.
A. Operating Assets : Operating assets are assets that are required in the daily operation of a business. In other words, operating assets are used to generate revenue from a company’s core business activities. It includes inventory, property, receivables, machinery, assets, patents, goodwill, copyrights, and so on.
B. Non-Operating Assets : They are not required for ordinary business operations, and the company can produce revenue. Non-operating assets include short-term investments, empty land and property, convertible bonds, interest income, and so on.
Examples of Assets
Examples of Non-current Business Assets:
Noncurrent assets, often known as long-term assets, are those that a company requires more than a year for conversion into cash. Long-term investments can be tangible, meaning they have a tangible appearance, or intangible, meaning they cannot be physically seen or touched. Long-term assets include the following: Office furnishings, Real estate, Land, Plant and Machinery etc.
Examples of Current Business Assets:
Current assets are items that a firm can turn into cash within a year, and they are referred to as liquidity assets by some in finance since they are readily accessible for use in activities or redistribution to shareholders. Current assets include the following: Cash,Accounts receivable , Marketable securities, Inventory, Bank accounts, Leased office equipment etc.
Assets in Balance Sheet
Difference between Assets and Liabilities
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Meaning
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Assets are items that a company owns or controls that have monetary worth and are utilised to produce money for the company.
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Liabilities are obligations or commitments owed by a company to third parties.
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Types
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Assets are classified according to their liquidity (fixed and current assets), tangible existence (tangible and non-tangible assets), and usage (operating and non-operating assets).
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Liabilities are divided into three categories: current liabilities, non-current liabilities, and contingent liabilities.
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Ownership Status
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Assets are things that the company owns or controls.
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Liabilities are things that the company owes to other companies.
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Treatment in books of accounts
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A decrease in the value of an asset is credited and an increase is debited.
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A liability is credited for any increase, while the decrease itself is debited.
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Balance Sheet
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Assets are present on the right side of the balance sheet.
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Liabilities are present on the left side of the balance sheet.
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Examples
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Cash, cash equivalents, machinery, land, securities, property, factory, building, patents, trademarks, licences, and so forth, are all examples of assets.
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Liabilities encompass a variety of financial obligations, such as interest-bearing mortgages, deferred tax liabilities, capital leases, and long-term and short-term loans.
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FAQs
1. What are Fixed Assets?
Answer:
Physical or material possessions that a company holds and utilises in the course of its business activities in order to supply goods and services to customers and generate revenue are referred to as fixed assets.
2. What are the benefits of fixed assets?
Answer:
Fixed assets hold significant importance for a multitude of reasons. They aid a business in delivering products and services to customers and generating revenue; they provide investors and creditors with an update on the financial condition of the company; and this may indicate that a company is experiencing rapid expansion.
3. What are Current Assets?
Answer:
Current assets are those that have the capability of being converted into currency within a single operating cycle or fiscal year. Current assets serve the purpose of supporting the financing of investments and daily operational expenses.
4. Are houses assets?
Answer:
Homes are thought of as investments. Any house has a mortgage on it, which is a type of debt and a risk. However, the house itself is an asset.
5. What are financial assets?
Answer:
Financial assets are investments in other institutions’ securities. Securities include stocks, government and corporate bonds, preferred equity, and hybrids. Security and market demand determine financial asset valuation.
6. What’s an asset?
Answer:
An asset is usually something that benefits a person or corporation economically. Thus, an asset is something you own or owe. Assets include a desktop computer, chair, and automobile.
7. Is Labor an Asset?
Answer:
No. Workers receive earnings or salaries for their efforts. Labour is not capital, like assets.
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