Definition Of Asset
An asset is an economic resource with value owned or controlled by an individual, corporation, or country. Assets are recorded in a company’s financial statement, called the balance sheet.
The purpose of purchasing or creating assets is to enhance the value of the company or help the company’s operations. These assets are categorized into four types: current, fixed, financial, and intangible.
Types of Assets
Current assets, a term used in accounting, refer to economic resources expected to be used up or converted into cash within one year. These assets include cash and cash equivalents, accounts receivable, inventory, and prepaid expenses.
Valuing cash is straightforward, but inventory and accounts receivable are periodically assessed by accountants to determine their recoverability. If there is evidence that a receivable might not be collected, it will be classified as impaired, and if inventory becomes outdated, it may be written off.
Some assets are recorded on balance sheets using the historical cost concept, which represents the original cost of the asset when the company purchased it. Historical costs may include expenses incurred to incorporate an asset into the company’s operations, such as delivery and setup costs.
Fixed assets, such as equipment, buildings, and plants, are economic resources expected to be used for more than a year. An accounting adjustment called depreciation is made to account for the ageing of these assets. This adjustment allocates the cost of the asset over time. Depreciation may or may not reflect the fixed asset’s loss of earning power.
Financial assets refer to investments made in the assets and securities of other institutions. These assets may include various items such as stocks, sovereign and corporate bonds, preferred equity, and other hybrid securities.
The value of financial assets is determined based on factors such as the underlying security, market supply, and demand.
Intangible assets are not physical assets, such as patents, trademarks, copyrights, and goodwill. How these assets are accounted for varies depending on the specific type of asset.
The Difference Between Current Assets And Fixed Assets
Assets are classified in accounting based on their expected usage period. Assets expected to be sold or used within a year are known as current assets, while those expected to be utilized for more than a year are referred to as fixed or noncurrent assets.
Unlike current assets, fixed assets are not easily sold and undergo depreciation.
Examples Of Assets
Individual assets encompass properties such as a house, land, financial investments, gems, artwork, precious metals like gold and silver, and a checking account. Meanwhile, corporate assets include cars, real estate, machinery, investments, cash and other assets that can be easily converted into cash and intellectual property.
Assets that do not have a physical presence and cannot be touched are termed non-physical or intangible assets. Despite not having a physical form, they are still valuable as they provide economic benefits.
Intellectual property such as patents or trademarks, contractual obligations, royalties, and goodwill are some examples of non-physical or intangible assets. Brand equity and reputation are also intangible assets that can hold significant value.
What Is Asset Management?
Asset management refers to acquiring, maintaining, and trading investments that have the potential to increase in value over time to increase total wealth. This service is typically provided by asset management professionals, who may be referred to as portfolio managers or financial advisors.
These professionals may work independently or as part of a financial institution like an investment bank.
Importance Of Asset Management
Asset management provides a convenient solution for businesses in different sectors and sizes to effectively monitor their fixed and liquid assets. With asset management, employees can easily locate the assets and track their usage and any modifications made.
The Significance Of Assets In Business Finances
Assets are significant in determining an individual’s or company’s net worth, which is important for financial standing. A higher number of assets and lower liabilities lead to a greater net worth, ultimately contributing to better financial stability.
Additionally, assets can help showcase a business’s profitability and accurate profit and loss reporting can be created. Effective asset management can increase goodwill and positive attitudes towards the business and assure shareholders while attracting investors.
Assets refer to any property, equipment, or resources that have a monetary value and are under the possession or control of an individual or an organization. On the other hand, liabilities are debts or obligations that an individual or organization owes to others, such as loans, taxes, or accounts payable.