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 can be classified as current, fixed, financial, or intangible.
Assets are economic resources owned or controlled with the expectation of providing future benefits.
Defining assets
According to Adam Barone, an asset is a resource with economic value owned or controlled by an individual, corporation, or country. The expectation is that these assets will generate cash flow, reduce expenses, or improve sales in the future. Assets are integral components of a company’s balance sheet and can be classified into current, fixed, financial, and intangible categories.
Types of assets
Understanding the classification of assets is crucial for businesses. It helps in assessing net working capital, solvency, and risk. For instance, distinguishing between tangible and intangible assets aids in evaluating a company’s risk in high-risk industries.
These are the key types of assets:
- Current assets: These are short-term resources expected to be converted into cash or consumed within a year. Examples include cash, accounts receivable, inventory, and prepaid expenses.
- Fixed assets: Resources with a lifespan of more than a year, such as plants, equipment, and buildings. Depreciation is applied to allocate their cost over time.
- Financial assets: Represent investments in securities and other institutions, including stocks, bonds, and preferred equity.
- Intangible assets: Economic resources without physical presence, such as patents, trademarks, copyrights, and goodwill.
Three essential characteristics of assets
To qualify as an asset, an item must possess three fundamental attributes:
- Ownership or Control: Firstly, a company must possess ownership or control over the asset. This control allows the company to transform the asset into cash or a cash equivalent and restricts others from exerting authority over it. It’s worth noting that the ownership aspect is crucial when distinguishing between the informal and technical interpretations of an asset. For instance, while companies often refer to their employees as their “greatest asset” informally, in accounting terms, companies lack complete control over them, as employees can readily seek alternative employment.
- Economic Value: Secondly, an asset must offer economic value. All assets should be saleable or convertible into cash, with the exception of certain right-of-use assets like lease agreements. In this regard, assets play a role in supporting production and facilitating business expansion.
- Resourcefulness: Lastly, an asset must function as a resource, implying that it has the capacity to generate future economic value. Essentially, this means the asset can contribute to generating positive cash inflows in the future.