What is an Asset?
An asset is a resource controlled by a business with the expectation of producing a future economic benefit.
Assets are employed to generate cash flows and are recorded on the balance sheet, and represent the uses of a company’s funds.
Businesses can further categorize them into current and non-current, which is dependent on the expected time taken to convert the asset into cash. Their physical existence and intended usage in the business also provides a basis for further categorization.
Key Learning Points
- Assets are reported in the balance sheet and are defined as a resource controlled by an entity with the probable expectation of producing future economic benefits
- Assets are reported in the balance sheet in order of their liquidity, cash and cash equivalents is always reported at the top
- Some assets are off balance sheet as a result of expensing their build costs
- All balance sheet items are checked for impairment on a regular basis and written down as necessary
- PP&E and intangibles are stated net of accumulated depreciation and amortization respectively
- The balance sheet is a statement of assets, liabilities and equity at a point in time
Classification of Assets
There are three types of assets which are generally classified according to the following:
- Liquidity: Based on how easy it is to convert assets into cash
- Physical Existence: Based on the physical nature of an asset (i.e. tangible versus. intangible assets)
- Usage: Based on the usage or purpose for business operations
The classification is shown below:
Types of Assets
Assets are classified based on how easily they can be converted into cash (their liquidity). Accordingly, assets are grouped as either current assets or non-current assets. Alternatively, it can be expressed as short-term versus long-term assets.
If expected to be converted into cash, consumed through business operations or discharged in less than 12 months, then they are classified as current assets.
Non-current assets, also called long-term assets or hard assets, are expected to be employed productively by a business for more than one year and are not readily convertible to cash.
Based on their physical existence, assets can be classified as either tangible or intangible.
Tangible assets are assets that one can see, feel or touch, and thus have a physical existence. Common examples include vehicles, buildings and property, plant and equipment (PP&E).
Intangible assets have no physical presence and are typically difficult to measure in value and meaningful useful economic life. Common examples include patents, copyrights and trademarks.
Assets that are classified in terms of their usage or purpose for business operation are recognized as operating assets. Other assets which are not used in daily business operations are classified as non-operating assets.
Operating assets are used in day-to-day business operations. Simply put, operating assets are employed by a company to produce products or services used to generate revenue.
Non-operating assets are not employed for daily business operations but can still generate economic benefits.