Types of Assets

An asset is a resource having economic worth that an individual, corporation, or country possesses or manages with the prospect of future gain.

An asset can be anything with financial worth that a person, organization, or nation can have or oversee with the prospect of future pickup. On the other hand, an investment may be a financial resource that a firm, for illustration, claims or controls. 

A financial asset is anything constrained in supply and can create a financial advantage by increasing cash inflows or bringing down cash outflows. Moreover, a right or other sort of get-to may be lawfully enforceable, meaning a firm may utilize money-related assets because it sees fit.

An owner can forbid or constrain their usage. Tangible and intangible resources are the two fundamental categories of resources.

Current and settled resources are two categories that make up unmistakable resources. Cash, inventories, and accounts receivable are illustrations of current resources, while arrival, structures, and apparatus are illustrations of settled resources.

Properties of Assets 

Assets support a company's capacity to generate cash and grow. They are grouped according to certain traits, such as their intended use for commercial purposes and ease of conversion into money (for assets controlled by the corporation). 

They help accountants analyze a firm's solvency and risk and aid lenders in evaluating whether to loan money to a company. An asset must have three characteristics to be considered an asset:

1. Future economic benefits 

The core of an asset is its' future economic benefit' or 'service potential.' This indicates that the support can offer services or advantages to the businesses using it. In a firm, that service potential or future economic gain finally leads to net cash inflows to the enterprise.

Money (cash and bank savings) is valued because of what it can buy. Therefore, it is exchanged for almost any accessible products or services or can be kept and exchanged for later. 

The purchasing power of money-its command over resources-is the foundation of its worth and future economic advantages. In return for money, products, or services, not cash-based assets benefit a company firm.

Other entities' services, especially personal services, cannot be kept and must be received and used concurrently. In addition, certain corporate businesses may have assets that include the right to use other companies' services for specific or foreseeable future periods.

2. Ownership

To begin, a corporation must own or control the asset. This allows the corporation to transform the investment into cash or a cash equivalent while limiting the item's power over others. 

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Not all assets with a right of use are convertible. It's common for lease agreements to prohibit the lease from being sold or transferred. The ownership attribute is critical when comparing an asset's informal and technical meanings. 

Employees, for example, are frequently referred to as a company's "biggest asset," yet in terms of accounting, corporations have little control over them-employees can readily quit for a new job.

3. Occurrence of a past transaction or event

Assets do not refer to an enterprise's future assets but rather the potential economic advantages of its current assets. Assets are just existing capacities to achieve future economic rewards.

These abilities result from transactions or other events or conditions impacting the firm. An asset can only be considered an asset of a specific business if it has access to and controls certain economic benefits. 

For example, an oil deposit may have been present in an area for millions of years but is only an asset when a business discovers or buys the rights to exploit it. This asset characteristic excludes items that may become an enterprise's assets in the future but has not yet become assets. 

Suppose the transactions or events that will grant the business access to and control a specific future economic advantage are still to come. In that case, the benefit cannot be considered an asset for the business.

Objectives of Asset Valuation 

Assets must be valued or quantified in terms of money to be included in financial accounting. However, other measurements, such as physical units, may be beneficial for management reasons in other accounting methods, such as managerial accounting.

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It is stated that asset value decisions should be made based on the user of the information and the purpose for which the information will be utilized. So let's now dive deeper into the objectives of asset valuation.

1. Income determination 

In accounting, value is required for income measurement. To calculate revenue from the rise in these values over time, the capital maintenance concept involves the valuation of assets. 

According to behavioral accounting theory, values should aid decision-makers in making accurate forecasts and judgments.

2. Managerial decisions 

Management might also utilize valuation numbers to make operational choices. However, the informational requirements of management differ significantly from those of investors and creditors.

Investors and creditors are primarily interested in projecting the future path of the firm based on historical performance and other facts; nevertheless, management must constantly make decisions that affect the future course of action.

As a result, management needs more information on values resulting from various courses of action.

For many distinct managerial choices, factors including opportunity costs, present values, and marginal or differential costs from anticipated differential cash flows are essential.

3. Determination of financial position 

The purpose of financial accounting is to determine a company's financial situation. Valuations are used in the balance sheet to provide a meaningful statement of economic status.

Investors want to know when dividends and other distributions will be paid to shareholders. Only when there is a link between measurements and predicted cash flows can asset valuations give helpful information.

Types of Assets 

Assets are an enterprise's economic resources that are recognized and quantified following widely accepted accounting rules. For example, to comprehend a company's net working capital, it is crucial to know which assets are current and fixed assets. 

In the case of a high-risk business, this aids in determining its solvency and risk. In addition, it is critical to understand each asset's revenue contribution and the percentage of revenue generated by core company operations. 

Assets are classified into three categories and further subdivided into different types.

1. Convertibility

The assets are classified based on their ease of getting converted into cash. Two types of investments are current and noncurrent assets.

2. Physical Existence

The assets are classified based on their physical existence.

3. Usage

The assets are classified based on their usage in a firm/business. 

Assets can contain certain delayed costs that are not assets but are identified and quantified following generally accepted accounting principles. First, let us go through the various asset classifications.

Current Assets 

A current asset that a firm owns may be quickly sold or consumed, converting liquid cash into assets. Current assets are assets that are predicted to survive less than a year. 

A business's current asset allows it to spend daily money and clear the current expenses. Following is the not-so-exhaustive list of existing assets.

1. Cash 

The ability of a corporation to maintain short-term solvency depends on its cash, which is the most liquid asset. Therefore, the cash balance listed under current assets represents the amount of money accessible to the company. 

This money may be utilized to cover the company's day-to-day expenditures immediately. It often comprises coins, currencies, bank deposits, checks, and money orders.

Consequently, as cash is the entity's most liquid asset, it is shown first under the account heading "current assets" on the balance sheet. All current assets account category items are delivered according to the assets' liquidity.

2. Cash Equivalents 

Funds equivalents result from firms investing cash in relatively short-term, interest-bearing financial products. These products are very liquid, safe, and may be turned into cash in as little as 90 days. 

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These securities include treasury bills, commercial paper, and money market funds. Furthermore, these assets are easily traded in the market, and their value is easily ascertained.

As a result, one of the most crucial cash management methods is to avoid storing idle funds in inactive accounts. Instead, excess cash should be invested in such tradable products.

3. Marketable Securities 

Marketable securities are investments expected to be turned into cash within a year. Treasury bills, notes, bonds, and equity securities are examples of these. 

Once bought, such investments are reported at cost plus brokerage costs. However, because these assets are easily tradable, their value may vary swiftly.

4. Prepaid Expenses 

Prepaid expenses are business running costs that have been paid in advance. As a result, cash decreases on the balance sheet when such charges are paid at the start of the accounting period

Simultaneously, a balance-sheet current asset of the same amount is generated under prepaid costs. However, these prepaid expenditures ultimately become current asset expenses. 

According to the matching accounting principle, these costs are transformed when the firm obtains gain from such an asset. Prepaid expenses include prepaid rent, prepaid insurance, and so on.

5. Accounts Receivable 

The sums that clients of a business owe for the products and services they received on credit from the company are known as accounts receivable. Therefore, a rise in the allowance for doubtful accounts results from increased bad debt expenditure. 

In some situations, accounts receivable need to be erased from the balance sheet if they cannot be collected from clients.

Noncurrent Assets 

A noncurrent asset is one in which the firm purchases or invests, but the value does not recur within an accounting year. These investments have a long lifespan, are challenging to convert to cash, and can provide a corporation with long-term financial gains.

In other words, rather than appraising the asset within the year of purchase, the corporation wants to capitalize on the cost of the assets or investment over a lengthy period or many years. As a result, the company's financial sheet shows noncurrent assets.

Depreciation, depletion, or amortization may be utilized to progressively lower the amount of a noncurrent asset on the balance sheet.

Noncurrent assets carry a higher risk than current assets since their value may drop over long periods. An excessive drop in weight may result in an impairment charge. Common examples of noncurrent assets are land, machinery, equipment, trademark, copyrights, etc. 

Tangible Assets 

An asset with a limited monetary value, usually a physical form, is referred to as a tangible asset. Tangible assets can almost always be traded for money. However, the liquidity of different marketplaces varies. 

Tangible assets can be classified as either current or long-term assets. Existing assets will have a limited transaction value if they are physically present on-site. 

Long-term assets, also known as fixed assets, are the second sector of the balance sheet's asset section; they have less liquidity and are more capital-intensive.

Tangible assets include:

1. Inventory 

It is tangible if you can physically touch it. As a result, several forms of inventories are considered physical assets. However, keep in mind that very identical items may have distinct qualities. 

While digital mp3 versions of the same music are intangible, a CD by your favorite singer can be considered physical property.

Tangible inventory assets comprise the whole industrial range. This starts with obtained raw materials and progresses to finished items that the firm has begun manufacturing. 

Finally, tangible assets comprise finished items that have not yet been sold and are being recorded as inventory.

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2. Machinery

All the large machinery a manufacturing business uses to process inventory goods counts as tangible assets. 

This encompasses any aspect of the production line with which employees physically engage during preparation, manufacture, assembly, or quality control.

3. Land 

Land is a tangible asset regardless of how it is intended to be used. This is true; whether the site is being kept for speculation, future redevelopment, or long-term ambitions remains unknown. 

This also applies to all sorts of property; whether rural or urban, physical land is a tangible asset. 

This runs as opposed to the growing digital ownership patterns in metaverse systems. Digital land is not a physical asset because the part of real estate cannot be touched.

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4. Building 

Of all tangible assets, physical structures are frequently the biggest and the most noticeable. Offices, warehouses, industrial plants, and another commercial real estate may be included. 

Any existing office (even one not being used) is a physical asset, regardless of whether a firm has switched to remote work. 

Intangible Assets 

Despite having no physical existence, intangible assets are the resources that help a business' operations. In addition, intangible assets grant the owner special rights or benefits. Patents, copyrights, and trademarks are among the examples. 

Some intangible assets are created due to the development of a company enterprise-organization costs-or indicate a firm's ability to generate earnings above and above regular payments-that is, goodwill.

The phrase "intangible assets" in accounting is not utilized with 100% accuracy and clarity. Only some assets are deemed intangible assets by convention. 

For instance, some resources, such as prepaid insurance, receivables, and investments, lack physical substance yet are not categorized as intangible assets.

Some intangible assets are listed below:

1. Goodwill 

In situations where the purchase price exceeds the fair values of all intangible and tangible assets acquired in the merger and the liabilities taken on during the process, goodwill is specifically recorded. 

The value of a company's brand name, stable client base, good customer relations, good staff relations, and patents or unique technologies are all examples of goodwill.

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2. Copyrights

Copyright is equivalent to a patent. A copyright grants the owner an exclusive license to publish, use, and sell a specific work of writing, music, or art. In addition, it shields the owner against unauthorized replication of his literary or other work. 

Copyright is registered at the purchase price or registration and legal expenses if obtained domestically. 

3. Trademarks 

Trademarks and trade names grant the owner-company the exclusive and perpetual right to use specific words, phrases, or symbols, often to identify a brand or family of products. 

Trademarks are recorded at the purchase price if they are purchased and at the registration and legal fees if they are not purchased but obtained internally inside a business.

Operating Assets 

Operating assets are assets bought for use in the continuing operations of a firm; these are assets required to produce income. Cash, prepaid costs, accounts receivable, inventory, and fixed assets are examples of operating assets. 

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Intangible assets, such as technical licenses used to make items, should also be considered functioning assets. However, marketable securities and other assets utilized for long-term investments are not regarded as operating assets. 

Assets no longer employed for operations, such as those kept for sale, are not considered operating assets. Furthermore, an operational asset is not a non-cash asset, such as an investment property, maintained for investment reasons.

Different types of operating assets are discussed below in brief:

1. Cash assets 

Cash assets are assets of a corporation that are liquid, that is, quickly converted to cash. For example, a company's money (or liquid) assets often include accounts receivable, product inventories, office equipment, machinery, stock shares, and marketable securities. 

These resources can be both material and ethereal as long as the business can quickly turn them into hard currency.

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2. Prepaid assets 

Prepaid expenses are assets generated by payments in advance for items or services that will be received in the future. Tax deferrals are also examples of assets. 

Companies often record prepaid costs as assets on the balance sheet first, then add expensed values to the income statement over time.

3. Fixed assets 

Fixed assets are acquisitions a firm makes for long-term usage to support commercial operations. These assets are not easily liquid, and businesses cannot convert them to cash. 

Companies often employ fixed assets to generate goods or services rather than sell or consume them. Fixed assets include company cars, land, buildings, and equipment.

Non-Operating Assets 

Non-operational assets are referred to as disproportionate assets by certain businesses. This is because they may be unnecessary and disposable. 

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A business with several financial investments, such as stocks, may sell them to get the money required. Non-operational assets might also comprise out-of-date items owned by the firm.

When a corporation ceases to use an operational asset, it becomes a non-operating asset. Businesses often use non-operating assets for long-term investment or as loan collateral. 

While these applications might benefit a corporation, they can also result in liability. For example, a firm that owns an empty building may have liability risk in the form of taxes or prospective litigation resulting from incidents on that property.

1. Unallocated cash

When a corporation has additional money that isn't required for day-to-day operations, it may consider it unallocated cash. Unallocated funds can originate from various sources, such as corporate payments or the sale of other assets. 

Unallocated cash can also occur when a company receives investor funds but has not yet utilized them for a defined reason.

2. Recreational item 

Some businesses have assets that aren't used in their everyday operations but are available for usage by their personnel. These are non-operating assets, such as automobiles or living places. 

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3. Vacant land

A firm may buy land to develop it or resell it for profit. If a firm relocates without selling property, it may also hold unoccupied land. 

For example, suppose a company relocates from one city to another. In that case, it may acquire property and construct a facility in the new site while continuing to own land in the old.

4. Marketable securities 

Any asset a firm may easily sell for cash is considered a marketable security. Bonds, other bank and stock investments, and other non-operating assets are frequently included in this category. 

Non-operating assets of this sort are frequently held by companies that prefer to deploy cash rather than hold unallocated funds. Companies may sell marketable securities to get funds rapidly.

Key Takeaways
  • An asset is a resource having economic worth that an individual, corporation, or country possesses or manages with the prospect of future gain.
  • Some assets are documented on company balance sheets using historical costs. The historical cost of an asset represents the initial cost of the item when purchased by a corporation. 
  • Historical expenditures might include costs to incorporate an item into the company's operations. 
  • Understanding the contribution of revenue from each asset and what percentage of a company's revenues originate from its main business operations is key to understanding how much cash a company makes or loses.
  • Assets indicate a net gain in value, whereas liabilities reflect a net loss in value. A common accounting equation compares a company's total assets to its entire liabilities, and investors use this ratio of assets vs. liabilities to determine the company's value.
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Researched and authored by Kavya Sharma | Linkedin

Reviewed and edited by Parul Gupta | LinkedIn

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