What Is an Asset? – Definition, Types, & Examples

In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. Assets represent a 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.

what is An assets in accounting?

An asset is a resource of economic value that an individual, company, or country owns or controls with the expectation that it will provide future benefits. Assets are reported on a company’s balance sheet and are purchased or created to increase a company’s value or to further the company’s operations.

An asset can be thought of as something that can generate cash flow, reduce expenses, or increase sales in the future, whether it’s manufacturing equipment or a patent.

what is an asset

Assets vs. Liabilities

It’s critical to understand the difference between assets and liabilities. A company lists its assets, liabilities, and equity on its balance sheet. Assets are resourcing a business either owns or controls that are expected to result in future economic value. Liabilities are what a company owes to others—for example, outstanding bills to suppliers, wages and benefits due to employees, as well as lease payments, mortgages, taxes, and loans.

As a note, for public companies, leased property and equipment are listed on the balance sheet as both an asset (Right of Use) and a liability (the present value of future lease payments). Private companies will soon be required to do the same under U.S. GAAP.

Equity is the company’s net worth—the value that would be returned to the owners or shareholders if all assets were sold and all debts were settled. The relationship between assets, liabilities, and equity is defined in the “accounting equation,” one of the basic principles of accounting:

Assets = Liabilities + Shareholders’ Equity

A business with more assets than liabilities is considered to have positive equity or shareholder value. If assets are less than liabilities, a company has negative equity or owes more than it is worth.

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How Assets Work?

Individuals buy and sell assets, whether they are shares of stock, a home, a vehicle, or anything else, for a number of reasons. Someone may sell shares of stocks or bonds to use the money in another fashion or to reinvest in a different manner. As with companies, assets may be sold because they are losing value too.

Companies acquire assets in the course of doing business. In addition to the tangible and intangible assets mentioned above, when a company purchases another business, that becomes an asset. This can create long-term value. However, throughout history, many companies have acquired businesses only to sell or fold them later at a loss.

Note: Individuals have a variety of ways to sell assets, whether they sell a home through a realtor, use a classifieds site to sell a car, or sell stock through a brokerage or trading app.

Types of assets

The two main types of assets are current assets and non-current assets. These classifications are used to aggregate assets into different blocks on the balance sheet so that one can discern the relative liquidity of the assets of an organization.

Types of Current Assets

Current assets are assets that can be converted into cash within one fiscal year or one operating cycle. Current assets are used to facilitate day-to-day operational expenses and investments.

Current assets are expected to be consumed within one year, and commonly include the examples of current assets include:

  • Cash and cash equivalents: Treasury bills, certificates of deposit, and cash
  • Marketable securities: Debt securities or equity that is liquid
  • Accounts receivables: Money owed by customers to be paid in the short-term
  • Inventory: Goods available for sale or raw materials

Types of Non-Current Assets

Fixed assets are long-term assets or non-current assets. Tangible fixed assets are those assets with a physical substance and are recorded on the balance sheet and listed as property, plant, and equipment (PP&E). Intangible fixed assets are those long-term assets without a physical substance, for example, licenses, brand names, and copyrights.

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The line items usually included in this classification are:

  • Tangible fixed assets (such as buildings, equipment, furniture, land, and vehicles)
  • Intangible fixed assets (such as patents, copyrights, and trademarks)
  • Goodwill

Investment Assets

The classifications used to define assets change when viewed from an investment perspective. In this situation, there are growth assets and defensive assets. These types are used to differentiate between the manner in which investment income is generated from different types of assets.

Growth assets generate income for the holder from rents, appreciation in value, or dividends. The values of these assets can rise in value to generate a return for the holder, but there is a risk that their valuations can also decline. Examples of growth assets are:

  • Equity securities
  • Rental property
  • Antiques

Defensive assets generate income for the holder primarily from interest. The values of these assets tend to hold steady or can decline after the effects of inflation are considered, and so tend to be a more conservative form of investment. Examples of defensive assets are:

  • Debt securities
  • Savings accounts
  • Certificates of deposit

Tangible and Intangible Assets

Assets may also be classified as tangible or intangible assets. Intangible assets lack physical substance, while tangible assets have the reverse characteristic. Most of an organization’s assets are usually classified as tangible assets. Examples of intangible assets are copyrights, patents, and trademarks. Examples of tangible assets are vehicles, buildings, and inventory.

Examples of assets include:

  • Cash and cash equivalents
  • Accounts Receivable
  • Inventory
  • Investments
  • PPE (Property, Plant, and Equipment)
  • Vehicles
  • Furniture
  • Patents (intangible asset)

Properties of an Asset

There are three key properties of an asset:

  • Ownership: Assets represent ownership that can be eventually turned into cash and cash equivalents
  • Economic Value: Assets have economic value and can be exchanged or sold
  • Resource: Assets are resources that can be used to generate future economic benefits

Classification of Assets

Assets are generally classified in three ways:

  • Convertibility: Classifying assets based on how easy it is to convert them into cash.
  • Physical Existence: Classifying assets based on their physical existence (in other words, tangible vs. intangible assets).
  • Usage: Classifying assets based on their business operation usage/purpose.
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FAQs.

What is an asset in accounting?

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.

What are the 3 types of assets?

Common types of assets include current, non-current, physical, intangible, operating, and non-operating. Correctly identifying and classifying the types of assets is critical to the survival of a company, specifically its solvency and associated risks.

What is an example asset?

Examples of Assets
Cash and cash equivalents. Accounts receivable (AR) Marketable securities. Trademarks. Patents.

How do you create an asset?

Building assets is simply increasing the amount of money, or access to money, that you have. This is done by acquiring things that have present or future monetary value. In general, the more assets that you acquire, the higher your net worth is.

What do you mean by 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.