In financial accounting, an asset is any resource owned by a business or an economic entity. It is anything that can be owned or controlled to produce value and that is held by an economic entity and that could produce positive economic value. Simply stated, assets represent value of ownership that can be converted into cash. The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business. One can classify assets into two major asset classes: tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets. Current assets include inventory, while fixed assets include buildings and equipment. Intangible assets are non-physical resources and rights that have a value to the firm because they give the firm an advantage in the marketplace. Intangible assets include goodwill, copyrights, trademarks, patents, computer programs, and financial assets, including accounts receivable, bonds and stocks.
Formal definition
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. It is the result of a past event or transaction.
Characteristics
One of the most widely accepted accounting definitions of 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." This means that:
The probable present benefit involve 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 nonprofit organizations, to provide services;
The entity can control access to the benefit;
The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred.
Employees are not considered assets, although they can generate future economic benefits. This is because an entity does not have sufficient control over its employees to satisfy the Framework's definition of an asset. Resources that are expected to yield benefits only for a short time are also not considered to be assets, for example in the USA the 12 month rule excludes items with a useful life of less than a year. Similarly, in economics, an asset is any form in which wealth can be held. There is a growing analytical interest in assets and asset forms in other social sciences too, especially in terms of how a variety of things can be turned into an asset.
Accounting
In the financial accounting sense of the term, it is not necessary to be able to legally enforce the asset's benefit for qualifying a resource as being an asset, provided the entity can control its use by other means. The accounting equation is the mathematical structure of the balance sheet. It relates assets, liabilities, and owner's equity: Assets are listed on the balance sheet. On a company's balance sheet certain divisions are required by generally accepted accounting principles, which vary from country to country. Assets can be divided into e.g. current assets and fixed assets, often with further subdivisions such as cash, receivables and inventory. 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.
Current assets
Current assets are cash and others that are expected to be converted to cash or consumed either in a year or in the operating cycle, without disturbing the normal operations of a business. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets:
Short-term investments – include securities bought and held for sale in the near future to generate income on short-term price differences.
Receivables – usually reported as net of allowance for non-collectable 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. See also adjusting entries.
Marketable securities: Securities that can be converted into cash quickly at a reasonable price. The phrase net current assets 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 three types of investments :
Investments in securities such as bonds, common stock, or long-term notes.
Investments in fixed assets not used in operations.
Investments in special funds.
Different forms of insurance may also be treated as long-term investments.
Fixed assets
Also referred to as PPE, these are purchased for continued and long-term use to earn profit in a business. This group includes land, buildings, machinery, furniture, tools, IT equipment, and certain wasting resources. They are written off against profits over their anticipated life by charging depreciation expenses. 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 & licenses, goodwill, trademarks, trade names, etc. These assets are amortized to expense over 5 to 40 years with the exception of goodwill. Websites are treated differently in different countries and may fall under either tangible or intangible assets.
Tangible assets
Tangible assets are those that have a physical substance, such as currencies, buildings, real estate, vehicles, inventories, equipment, art collections, precious metals, rare-earth metals, Industrial metals, and crops. The physical health of tangible assets deteriorate over time. As a result, asset managers use deterioration modeling to predict the future conditions of assets. Depreciation is applied to tangible assets when those assets have an anticipated lifespan of more than one year. This process of depreciation is used instead of allocating the entire expense to one year. Tangible assets such as art, furniture, stamps, gold, wine, toys and books are recognized as an asset class in their own right. Many high-net-worth individuals will seek to include these tangible assets as part of their overall asset portfolio. This has created a need for tangible asset managers.
Wasting asset
A wasting asset is an asset that irreversibly declines in value over time. This could include vehicles and machinery, and in financial markets, options contracts which continually lose time value after purchase. Mines and quarries in use are wasting assets. An asset classified as wasting may be treated differently for tax and other purposes than one that does not lose value; this may be accounted for by applying depreciation.
Comparison: current assets, liquid assets and absolute liquid assets
