Any business needs assets and it would take time to acquire assets. The assets are essential items of a company that can assist generate profit over time and bring value to the company.
The valuation of assets plays a significant role while selling a business. The value of fixed assets can be evaluated easily but intangible assets might be hard to value.
What are Assets?
An asset is any resource, owned by the company entity, which is capable of generating cash flows over the long term.
A company purchases assets because it increases the value of a business and helps a company generate economic benefits in the future.
The assets are reported on the company's balance sheet and found on the left side of the balance sheet.
The balance sheet provides a snapshot of how well a company managed or used its total assets.
For Example,
The chair and table purchased by Mr Sayan are assets, Whereas he sells them. So, he will be able to get some money.
Similarly, stock bought by him is another asset capable of generating cash when he sells them. Some other examples of assets can be - land, buildings, vehicles etc.
Properties of an Assets
There are three types of properties of an asset as follows:
1. Resource
The assets are resources that help to achieve future economic benefits and generate more revenue over time.
2. Ownership
The assets represent ownership that is eventually converted into cash or cash equivalents.
3. Economic value
The assets have economic value and can be exchanged or sold.
Different Types of Assets
Assets can be further classified depending upon their holding, tangible and usage.
Assets are a component of the company's balance sheet and are expressed at historical cost less depreciation subtracted so far or at cost or market price, whichever is lower.
The three types of assets are following:
1. Based on the period of holding
Not all assets held by the firm are for immediate reselling. Such as Mr Ayan holds the table and chair, to help him in his business and he owns stocks to sell readily and generate revenue.
Hence, based on the period of holding, assets can be divided into current assets and Fixed assets.
A. Current Assets:
These assets are held for one year and can be converted into cash. Current assets are also termed liquid assets.
Current assets are also known as liquid assets and held for a short period compared to fixed assets.
For example,
Cash & cash equivalents, stock, inventory, marketable securities, short-term investments, fixed deposits, accrued incomes, bank balances, debtors, accounts receivable, prepaid expenses etc.
B. Fixed Assets:
Fixed assets are also known as non-current assets. These assets are held by the company for more than one year. They also cannot be very easily converted into cash.
Generally, the value of non-current assets diminishes over time and that is called depreciation.
Fixed assets help to grow a business and generate long term value to a company. That is why fixed assets are considered long term assets.
For example,
Land, building, furniture, equipment, machinery etc.
2. Based on physical existence
The only condition required to recognize an asset is its capability to generate future cash flows. Hence, the assets are classified as either tangible assets or intangible assets.
A. Tangible Assets:
Tangible assets have physical existence. We can touch, feel and see the assets. However, the few current assets like inventory and cash are considered to be tangible assets and all fixed assets are tangible.
For example,
Land, plant, machinery investments, buildings, inventory etc.
B. Intangible Assets:
Intangible assets do not have a physical existence. We can not touch, see and feel intangible assets.
A business may acquire or create a brand name, like Nike, KFC etc. These assets can generate revenues in the long run.
Many of us buy a product only by seeing its brand in the market. Intangible assets can be amortized every year.
For example,
Patent, goodwill, copyright, trademark, brand etc.
3. Based on usage
Not all assets purchased by an entity are required in daily operations. Some assets are held by the company as an investment also.
Therefore, based on usage, assets can be classified as operating assets and non-operating assets.
A. Operating Assets:
Operating assets are required by a business for its day to day operations. Operating assets are used for producing revenue from a company's core business operations.
For example,
Inventory, plant, machinery, cash, bank balance etc.
B. Non-Operating Assets:
These assets are not required by the business in day to day operations but are also capable of generating revenue.
For example,
Vacant land, marketable securities, short term investments etc.
Total Assets vs. Net Assets
Total assets refer to the total amount of money owed by a person or entity. Total assets show the sum of total liabilities and shareholders equity.
Total assets = Total Liabilities + Shareholders equity
Net assets refer to the amount by which total assets exceed your total liabilities.
Net Assets = Total Assets - Total Liabilities
FAQs
1. Is inventory a current asset?
Yes, inventory is a current asset because inventory takes almost 90 days to be converted into cash. Inventory can be converted into cash within one year.
2. Is cash an asset?
Yes, cash is a current asset that can be easily used for day to day business activities. Cash is a very necessary item in every business operation. Can
3. Is equipment a current asset?
Equipment is a fixed asset because we can't sell equipment within one year. However, fixed assets can generate cash flows over a long period.
