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.
The balance sheet of a firm records the monetary value of the assets owned by the firm.
It is money and other valuables belonging to an individual or business.
Two major asset classes are 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 market place.
Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer
programs, 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.
Asset characteristics Probably the most accepted accounting definition
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 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 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, 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 other assets 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:
Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit
accounts, and negotiable instruments.
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 noncollectable 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 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.
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 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
See also Trading account assets
References