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In financial accounting, an asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset). 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 such items as buildings and equipment. Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the marketplace. Examples of intangible assets include goodwill, copyrights, trademarks, patents and computer programs, and financial assets, including such items as accounts receivable, bonds and stocks.

In accounting, an asset is any resource owned by a business, having economic value or the expectation of future benefit. An asset can have tangible value, such as as cash, notes receivable, accounts receivable, property, stock, inventory, fixtures, business machinery, or intangible value such as property rights, patents, and goodwill.

Assets can be categorized in various ways: Monetary Assets are those that consist of cash or will be converted to cash. An example of a monetary asset is Accounts Receivable. Non-monetary assets are not normally converted to cash. Machinery and Equipment owned by a company are examples of nonmonetary or fixed assets.

Assets may also be considered as Current or Non-current. Current assets are generally expected to be consumed within one year. Examples of current assets would be cash and inventory. Non-current assets are considered to have permanent, long-term benefits and life expectancy of more than one year. Examples of long term assets are equipment, buildings, and real estate.

When assets become impaired, their value must be adjusted. If a company holds an account receivable from another company that goes bankrupt, the receivable must be written down to the amount (which is very possibly zero) that will eventually be received. Fixed, or long term assets are usually subject to depreciation, accounting for normal wear and tear on the asset, which decreases it's value. Real estate is the only long-term asset that is normally not subject to depreciation, as it tends to increase, rather than decrease in value over time.

A business's net assets (or net worth) is the excess of assets over liabilities.

Accounting Terms Accounting


In financial accounting, an asset is an economic resource. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset).<ref name=“Sullivan 2003 272”>

</ref>

The balance sheet of a firm records the monetary<Ref Name=“CPA”>J. G. Siegel, N. Dauber & J. K. Shim, “The Vest Pocket CPA”, Wiley, 2005.<p>There are different methods of assessing the monetary value of the assets recorded on the Balance Sheet. In some cases, the Historical Cost is used; such that the value of the asset when it was bought in the past is used as the monetary value. In other instances, the present fair market value of the asset is used to determine the value shown on the balance sheet.</p></ref> value of the assets owned by the firm. It is money and other valuables belonging to an individual or business.<ref name=“Sullivan 2003 272”/> Two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets.<Ref Name=“FinanceDict”>J. Downes, J.E. Goodman, “Dictionary of Finance & Investment Terms”, Baron's Financial Guides, 2003</ref> Current assets include inventory, while fixed assets include such items as buildings and equipment.<Ref Name=“CPA_Finance”>J. Downes, J.E. Goodman, “Dictionary of Finance & Investment Terms”, Baron's Financial Guides, 2003; and J. G. Siegel, N. Dauber & J. K. Shim, “The Vest Pocket CPA”, Wiley, 2005.</ref>

Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs,<Ref Name=“CPA_Finance” /> and financial assets, including such items as 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<ref name=“IFRS for SMEs”>

</ref> (Framework Par 49a).

Asset characteristics

Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board.<ref>The International Accounting Standards Board, IASB</ref> 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.”<ref>IASB.org, IFRS</ref>

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 not-for-profit 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 like machinery is, even though 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.

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

Assets in 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 = Liabilities + Capital (where Capital for a corporation equals Owner's Equity) :Liabilities = Assets - Capital :Capital = Assets - Liabilities

That is, the total value of a firm's Assets are always equal to the combined value of its “equity” and “liabilities.”

Assets are listed on the balance sheet. In a company's balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country.<ref>Intermediate Accounting–Kieso, et. al</ref> 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 other assets expected to be converted to cash or consumed either in a year or in the operating cycle (whichever is longer), 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:

  1. Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts).
  2. Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).
  3. Receivables — usually reported as net of allowance for noncollectable accounts.
  4. 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.
  5. Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (common examples are insurance or office supplies). See also adjusting entries.

Marketable securities: Securities that can be converted into cash quickly at a reasonable price.

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 three types of investments:

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

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

Fixed assets

Also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use in earning profit in a business. This group includes as an asset land, buildings, machinery, furniture, tools, IT equipment, e.g., laptops, 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 assets). Accumulated depreciation is shown in the face of the balance sheet or in the notes. An asset is an important factor in a balance sheet.

These are also called capital assets in management accounting.

Intangible assets

Intangible assets lack of 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.

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, and precious metals.

Comparison: current assets, liquid assets and absolute liquid assets

Current assets Liquid assets Absolute liquid assets
Stocks
Prepaid expenses
Bills receivable Bills receivable
Cash in hand Cash in hand Cash in hand
Cash at bank Cash at bank Cash at bank
Accrued incomes Accrued incomes Accrued incomes
Loans and advances (short term) Loans and advances (short term) Loans and advances (short term)
Trade investments (short term) Trade investments (short term) Trade investments (short term)

See also

References

asset.txt · Last modified: 2020/03/12 18:31 (external edit)