Asset

Quick Summary of Asset

Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities,  common stock,  preferred stock, and retained earnings.  From an accounting perspective, assets are divided into the following categories: current assets (cash and other liquid items),  long-term assets (real estate, plant, equipment),  prepaid and deferred assets (expenditures for future costs such as insurance, rent, interest), and intangible assets (trademarks, patents, copyrights, goodwill).

In business and accounting by asset is meant probable future economic benefits controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained.

Asset Characteristics

Assets have three essential characteristics:

• They embody a future benefit that involves a capacity, singly or in combination with other assets, in the case of profit-oriented enterprises, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;
• The entity can control access to the benefit; and,
• The transaction or event giving rise to the entity’s right to, or control of, the benefit has already occurred.

It is not necessary, in the financial accounting sense of the term, for control of access to the benefit to be legally enforceable for a resource to be an asset, provided the entity can control its use by other means.

It is important to understand that in an accounting sense an asset is not the same as ownership. In accounting, ownership is described by the term “equity,” (see the related term shareholders’ equity). Assets are equal to “equity” plus “liabilities.”

The accounting equation relates to assets, liabilities, and owner’s equity:

Assets = Liabilities + Owners’ Equity,

The accounting equation is the mathematical structure of the balance sheet.

Assets are usually listed on the balance sheet. It has a normal balance, or usual balance, of debit (i.e., asset account amounts appear on the left side of a ledger).

Similarly, in economics, an asset is any form in which wealth can be held.

Probably the most accepted accounting definition of an asset is the one used by the International Accounting Standards Board. The following is a quotation from the IFRS Framework: “An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”

Assets are formally controlled and managed within larger organizations via the use of asset tracking tools. These monitor the purchasing, upgrading, servicing, licensing, disposal etc., of both physical and non-physical assets.

Classification Of Assets

Assets may be classified in many ways. In a company’s balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country.

Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. These assets are continually turned over in the course of a business during normal business activity.

There are 5 major items included in current assets:

• Cash — it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts).
• Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).
• Receivables — usually reported as net of allowance for uncollectible accounts.
• Inventory — trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the “lower of cost or market” rule.
• Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also adjusting entries.

The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities.

Long-Term Investments

Often referred to simply as “investments.” Long-term investments are to be held for many years and are not intended to be disposed of in the near future. This group usually consists of four types of investments:

• Investments in securities, such as bonds, common stock, or long-term notes.
• Investments in fixed assets not used in operations (e.g., land held for sale).
• Investments in special funds (e.g., sinking funds or pension funds).
• Investments in subsidiaries or affiliated companies.

Different forms of insurance may also be treated as long term investments.

Fixed Assets

Also referred to as PPE (property, plant, and equipment), or tangible assets, these are purchased for continued and long-term use in earning profit in a business. This group includes land, buildings, machinery, furniture, tools, and certain wasting resources e.g., timberland and minerals. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land). Accumulated depreciation is shown in the face of the balance sheet or in the notes.

These are also called capital assets in management accounting.

Intangible Assets

Intangible assets lack physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill.

Some assets such as websites are treated differently in different countries and may fall under either tangible or intangible assets.

Other Assets

This section includes a high variety of assets, most commonly:

• long-term prepaid expenses
• long-term receivables
• intangible assets (if they represent just a very small fraction of total assets)
• property held for sale.

In a lot of cases, this section is too general and broad, because assets could be classified into four above categories.

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