In financial accounting, an asset is an economic resource. Anything tangible or intangible that can be 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).
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.
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 (Framework Par 49a).
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 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. Resources that are expected to yield benefits only for a short time can also be considered not to be assets, for example in the USA the 12 month rule excludes items with a useful life of less than a year.
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.
- 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. 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 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:
- 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).
- Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).
- 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 (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.
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 (e.g., land held for sale).
- Investments in special funds (e.g. sinking funds or pension funds).
Different forms of insurance may also be treated as long term investments.
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.
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.
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 have become recognized as an asset class in their own right and 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.
Comparison: current assets, liquid assets and absolute liquid assets
|Current assets||Liquid assets||Absolute liquid assets|
|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)|
- O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall. p. 272. ISBN 0-13-063085-3.
- J. G. Siegel, N. Dauber & J. K. Shim, The Vest Pocket CPA, Wiley, 2005.
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.
- J. Downes, J. E. Goodman, Dictionary of Finance & Investment Terms, Barron's Financial Guides, 2003
- J. Downes, J. E. Goodman, Dictionary of Finance & Investment Terms, Barron's Financial Guides, 2003; and J. G. Siegel, N. Dauber & J. K. Shim, The Vest Pocket CPA, Wiley, 2005.
- IFRS for SMEs. London: IASB (International Accounting Standards Board). 2015. p. 14. ISBN 978-0-409-04813-1.
- The International Accounting Standards Board, IASB
- IASB.org, IFRS
- Intermediate Accounting, Kieso, et. al
- "Educating the world about finance". Investopedia. Retrieved 2015-06-21.
- Downes, John., Goodman, Jordan Elliot., Finance and Investment Handbook, Sixth Edition, Barron's Educational Series, Inc., 2003