Assets is a term used for valuable resources that an individual or a business owns.
An asset is a resource with economic value that’s expected to provide future benefits, such as inventory, equipment, or real estate. The opposite of an asset is a liability, which is something you owe, such as a bill from a supplier or a loan.
Most of your assets should be included in a business’ balance sheet. Usually objects worth less than a certain amount should not be included. What that amount is will vary from country to country.
What makes an asset?
An asset is defined by three things:
- Ownership or control: You must own or control the asset, and be able to convert the asset into cash or a cash equivalent. At the same time you must be able to restrict others from doing the same.
- Economic value: The asset must be valuable. It must be possible to sell the asset or convert it into cash.
- Resource value: The asset must be capable of generating future economic value.
Fun fact: Employees do not count
While businesses often refer to employees as their “greatest asset”, in accounting terms they are not assets; employees can easily apply for other jobs without the business being able to control them.
Different types of assets
There are different types of assets, such as current, operating, fixed, and intangible assets. It’s important to understand the different types and to be able to categorize them correctly: You have to know what to include on your balance sheet and what to add to your income statement. You also have to know which items should be depreciated, and which shouldn’t.
Let’s take a look at the different types.
Current assets
These are short-term resources expected to be converted into cash or used within the year. Examples include cash, outstanding invoices and inventory. These should be included in your balance sheet.
Operating assets
Operating assets are essential tools you need to sell products and services, such as computers, machinery, and so on. These should be included in your income statement, not your balance sheet. The only exception is if they are worth more than a certain amount, in which case they should be included as a fixed asset. What that amount is will vary from country to country.
Fixed assets
Resources with a lifespan of more than a year, such as equipment, and buildings are classed as fixed assets. You use deprecation in your bookkeeping to allocate their cost over time. These should be included in your balance sheet.
Intangible assets
These are economic resources that aren’t physical, such as patents, trademarks, copyrights, and goodwill. These should be included in your balance sheet.
