assets
   HOME

TheInfoList



OR:

In
financial accounting Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of Financial statement audit, financial statements available for p ...
, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of
ownership Ownership is the state or fact of legal possession and control over property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of th ...
that can be converted into
cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-immed ...
(although cash itself is also considered an asset). The
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a busine ...
of a firm records the monetaryThere 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. value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a
business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
. Assets can be grouped into two major classes: tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets.J. Downes, J. E. Goodman, ''Dictionary of Finance & Investment Terms'', Barron's Financial Guides, 2003 Current assets include
cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-immed ...
,
inventory Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Stock management, Inventory management is a discipline primarily about s ...
,
accounts receivable Accounts receivable, abbreviated as AR or A/R, are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. These are generally in the form of invoices raised ...
, while fixed assets include
land Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other body of water, bodies of water. It makes up 29% of Earth's surface and includes the Continent, co ...
, buildings and equipment. 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. Intangible assets are non-physical resources and rights that have a value to the firm because they give the firm an advantage in the marketplace. Intangible assets include goodwill,
copyrights A copyright is a type of intellectual property that gives its owner the exclusive right to copy, distribute, adapt, display, and perform a creative work, usually for a limited time. The creative work may be in a literary, artistic, education ...
, trademarks,
patents A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an sufficiency of disclosure, enabling disclo ...
,
computer program A computer program is a sequence or set of instructions in a programming language for a computer to Execution (computing), execute. Computer programs are one component of software, which also includes software documentation, documentation and oth ...
s, and financial assets, including financial investments, bonds, and
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
s.


Formal definition

IFRS (International Financial Reporting Standards), the most widely used financial reporting system, defines: "An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits." The definition under US GAAP (Generally Accepted Accounting Principles used in the United States of America): "An asset is a present right of an entity to an economic benefit."


Characteristics

CON 8.4 provides the following discussion of the nature of an asset: E17: An asset has the following two essential characteristics:
(a) It is a present right
(b) The right is to an economic benefit. E18:The combination of those two characteristics allows an entity to obtain the economic benefit and control others’ access to the benefit. A present right of an entity to an economic benefit entitles the entity to the economic benefit and the ability to restrict others’ access to the benefit to which the entity is entitled. This accounting definition of assets includes items that are not owned by an enterprise, for example a leased building ( Finance lease), but excludes employees because, while they have the capacity to generate economic benefits, an employer cannot control an employee. In
economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
, an Asset (economics) is any form in which
wealth Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
can be held. There is a growing analytical interest in assets and asset forms in other
social science Social science is one of the branches of science, devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. The term was formerly used to refer to the field of sociology, the o ...
s too, especially in terms of how a variety of things (e.g., personality, personal data, ecosystems, etc.) can be turned into an asset.


Accounting

In the
financial accounting Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of Financial statement audit, financial statements available for p ...
sense of the term, it is not necessary to have title (a legally enforceable ownership right) to an asset. An asset may be recognized as long as the reporting entity controls the rights (economic resource) the asset represents. The essential characteristic of control is the ability to benefit from the asset and prevent other entities from doing likewise. The IFRS conceptual framework explains (CF 4.20): An entity controls an economic resource if it has the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it. Control includes the present ability to prevent other parties from directing the use of the economic resource and from obtaining the economic benefits that may flow from it. It follows that, if one party controls an economic resource, no other party controls that resource. The accounting equation is the mathematical structure of the
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a busine ...
. It relates assets, liabilities, and owner's equity: :Assets = Liabilities + Equity (in financial accounting, the term equity, not
Capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capitals, List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the dura ...
, is used) :Liabilities = Assets − Equity : Equity = Assets − Liabilities Assets are reported on the
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a busine ...
. On the balance sheet, additional sub-classifications are generally required by
generally accepted accounting principles Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
(GAAP), which vary from country to country. Assets can be divided into current and non-current (a.k.a. fixed or long-lived). Current assets are generally subclassified as cash and cash equivalents, receivables, inventory, and accruals (such as pre-paid expenses). Non-current assets are generally subclassified as investments (financial instruments), property, plant and equipment, intangible assets (including goodwill) and other assets (such as resources or biological assets).


Current assets

Current assets are cash and others that are 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 A currency, "in circulation", from la, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...
, 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 Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Stock management, Inventory management is a discipline primarily about s ...
– trading these assets is a normal business of a company. The inventory value reported on the
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a busine ...
is usually the historical cost or fair market value, whichever is lower. This is known as the "
lower of cost or market Lower of cost or market (LCM or LOCOM) is a Convention of conservatism, conservative approach to valuing and reporting inventory. Normally, ending inventory is stated at historical cost. However, there are times when the original cost of the ending ...
" 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 The phrase ''net current assets'' (also called '' working capital'') 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 (e.g., land held for sale) # Investments in special funds (e.g. sinking funds or pension funds). Different forms of
insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to Hedge ( ...
may also be treated as long-term investments.


Fixed assets

Also referred to as PP&E (property, plant and equipment), these are purchased for continued and long-term use to earn profit in a business. This group includes
land Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other body of water, bodies of water. It makes up 29% of Earth's surface and includes the Continent, co ...
,
building A building, or edifice, is an enclosed structure with a roof and walls standing more or less permanently in one place, such as a house or factory (although there's also portable buildings). Buildings come in a variety of sizes, shapes, and funct ...
s,
machinery A machine is a physical system using Power (physics), power to apply Force, forces and control Motion, movement to perform an action. The term is commonly applied to artificial devices, such as those employing engines or motors, but also to na ...
,
furniture Furniture refers to movable objects intended to support various human activities such as seating (e.g., stools, chairs, and sofas), eating ( tables), storing items, eating and/or working with an item, and sleeping (e.g., beds and hammocks) ...
,
tool A tool is an object that can extend an individual's ability to modify features of the surrounding environment or help them accomplish a particular task. Although many animals use Tool use by animals, simple tools, only Human, human beings, whose u ...
s, IT equipment (e.g., laptops), and certain wasting resources (e.g., timberland and
mineral In geology and mineralogy, a mineral or mineral species is, broadly speaking, a solid chemical compound with a fairly well-defined chemical composition and a specific crystal structure that occurs naturally in pure form.John P. Rafferty, ed. (2 ...
s). They are written off against profits over their anticipated life by charging
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
expenses (with exception of land assets). Accumulated depreciation is shown in the face of the balance sheet or in the notes. These are also called capital assets in
management accounting In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions. Definition One simple definition of management accounting is th ...
.


Intangible assets

Intangible assets lack physical substance and usually are very hard to evaluate. They include
patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an sufficiency of disclosure, enabling disclo ...
s,
copyright A copyright is a type of intellectual property that gives its owner the exclusive right to copy, distribute, adapt, display, and perform a creative work, usually for a limited time. The creative work may be in a literary, artistic, education ...
s, franchises &
license A license (or licence) is an official permission or permit to do, use, or own something (as well as the document of that permission or permit). A license is granted by a party (licensor) to another party (licensee) as an element of an agreeme ...
s, goodwill,
trademark A trademark (also written trade mark or trade-mark) is a type of intellectual property consisting of a recognizable sign (semiotics), sign, design, or expression (language), expression that identifies Good (economics and accounting), product ...
s,
trade name A trade name, trading name, or business name, is a pseudonym used by companies that do not operate under their registered company name. The term for this type of alternative name is a "fictitious" business name. Registering the fictitious name w ...
s, etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill.
Website A website (also written as a web site) is a collection of web pages and related content that is identified by a common domain name and published on at least one web server. Examples of notable websites are Google Search, Google, Facebook, Amaz ...
s 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 Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
,
vehicles A vehicle (from la, vehiculum) is a machine that transports people or cargo. Vehicles include wagons, bicycles, motor vehicles (motorcycles, cars, trucks, buses, mobility scooters for disabled people), railed vehicles (trains, trams), watercr ...
,
inventories Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Stock management, Inventory management is a discipline primarily about s ...
, equipment, art collections,
precious metals Precious metals are rare, naturally occurring metallic chemical elements of high Value (economics), economic value. Chemically, the precious metals tend to be less reactivity (chemistry), reactive than most elements (see noble metal). They ...
, rare-earth metals, Industrial metals, and crops. The physical health of tangible assets deteriorate over time. As a result, asset managers use deterioration modeling to predict the future conditions of assets.
Depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
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 are recognized as an asset class in their own right.Downes, John; Goodman, Jordan Elliot. ''Finance and Investment Handbook'', Sixth Edition, Barron's Educational Series, Inc., 2003. 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.


Wasting Asset

A wasting asset is an asset that irreversibly declines in value over time. This could include vehicles and machinery, and in financial markets, options contracts that continually lose time value after purchase. Mines and quarries in use are wasting assets. An asset classified as wasting may be treated differently for tax and other purposes than one that does not lose value; this may be accounted for by applying
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
.


Comparison: current assets, liquid assets and absolute liquid assets


See also

* Assets under management (AUM)


References

{{Authority control Accounting terminology Finance