Asset

What Is an Asset?

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it's manufacturing equipment or a patent. 

Understanding Assets

An asset represents an economic resource for a company or represents access that other individuals or firms do not have. A right or other access is legally enforceable, which means economic resources can be used at a company's discretion, and their use can be precluded or limited by an owner.

For an asset to be present, a company must possess a right to it as of the date of the financial statements. An economic resource is something that is scarce and has the ability to produce economic benefit by generating cash inflows or decreasing cash outflows.

Assets can be broadly categorized into short-term (or current) assets, fixed assets, financial investments, and intangible assets.

Types of Assets

Current Assets

Current assets are short-term economic resources that are expected to be converted into cash within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses.

While cash is easy to value, accountants periodically reassess the recoverability of inventory and accounts receivable. If there is evidence that accounts receivable might be uncollectible, it'll become impaired. Or if inventory becomes obsolete, companies may write off these assets.

Assets are recorded on companies' balance sheets based on the concept of historical cost, which represents the original cost of the asset, adjusted for any improvements or aging.

Fixed Assets

Fixed assets are long-term resources, such as plants, equipment, and buildings. An adjustment for the aging of fixed assets is made based on periodic charges called depreciation, which may or may not reflect the loss of earning powers for a fixed asset.

Generally accepted accounting principles (GAAP) allow depreciation under two broad methods. The straight-line method assumes that a fixed asset loses its value in proportion to its useful life, while the accelerated method assumes that the asset loses its value faster in its first years of use.

Financial Assets

Financial assets represent investments in the assets and securities of other institutions. Financial assets include stocks, sovereign and corporate bonds, preferred equity, and other hybrid securities. Financial assets are valued depending on how the investment is categorized and the motive behind it.

Intangible Assets

Intangible assets are economic resources that have no physical presence. They include patents, trademarks, copyrights, and goodwill. Accounting for intangible assets differs depending on the type of asset, and they can be either amortized or tested for impairment each year.

How do I know if something is an asset?

An asset is something that provides a current, future, or potential economic benefit for an individual or other entity. An asset is, therefore, something that is owned by you or something that is owed to you. Therefore, a $10 bill, a desktop computer, a chair, or a car are all assets. If somebody owes you money, that loan is also an asset because you are owed that amount (even though the loan is a liability for the one paying you back).

What about non-physical assets?

Intangible assets provide an economic benefit to somebody, but you cannot physically touch them. These are an important class of assets that include things like intellectual property (e.g., patents or trademarks), contractual obligations, royalties, and goodwill. Brand equity and reputation are also examples of non-physical assets that can be quite valuable. Some financial assets, such as shares of stock or derivatives contracts are also intangible.

Is labor an asset?

No. Labor is the work carried out by human beings, for which they are paid in wages or a salary. Labor is distinct from assets, which are considered to be capital.

How are current assets different from fixed (noncurrent) assets?

Companies will segregate their assets by their time horizon in use. Fixed assets, also known as noncurrent assets, are intended for longer-term use (one year or longer) and are not often easily liquidated. As a result, unlike current assets, fixed assets undergo depreciation.