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An asset is a resource or property having a monetary/economic value possessed by an individual or entity, which is capable of producing some future economic benefit. Assets are generally brought in business to benefit from them and to increase the value of a business. In simple language, it means anything that a person “owns” say a house or equipment. In accounting context, an asset is a resource that can generate cash flows. Assets are found on the right-hand side of the balance sheet and can also be referred to as “Sources of Funds”.
Assets are classified into different types based on their convertibility to cash; use in business or basis their physical existence. Assets are a part of the balance sheet and are generally stated at cost or market value, whichever is lower.
Classification of Assets
Assets are generally classified in the following three ways depending upon nature and type:
1. Convertibility: One way of classification of assets is based on their easy convertibility into cash. According to this classification, total assets are classified either into Current Assets or Fixed Assets.
Assets which are easily convertible into cash like stock, inventory, marketable securities, short-term investments, fixed deposits, accrued incomes, bank balances, debtors, prepaid expenses etc. are classified as current assets. Current assets are generally of a shorter life span as compared to fixed assets which last for a longer period. Current assets can also be termed as liquid assets.
Fixed assets are of a fixed nature in the context that they are not readily convertible into cash. They require elaborate procedure and time for their sale and converted into cash. Land, building, plant, machinery, equipment and furniture are some examples of fixed assets. Other names used for fixed assets are non-current assets, long-term assets or hard assets. Generally, the value of fixed assets generally reduces over a period of time (known as depreciation).
2. Physical Existence: Another classification of assets is based on their physical existence. According to this classification, an asset is either a tangible asset or intangible asset.
Tangible assets are those assets which we can touch, see and feel. All fixed assets are tangible. Moreover, some current assets like inventory and cash fall under the category of tangible assets too.
Intangible assets cannot be seen, felt or touched physically by us. Some examples of intangible assets are goodwill, franchise agreements, patents, copyrights, brands, trademarks etc.
These are also classified under assets because the business owners reap monetary gains with the help of these intangible assets. A company’s trademark, brand and goodwill contribute to its marketing and sale of its products. Many buyers purchase goods only by seeing its trademark and brand in the market.
According to a third way of classification, assets are either operating or non-operating. This classification is based on usage of the asset for business operation. Assets which are predominantly used for day-to-day business are classified as operating assets and other assets which are not used in operation are classified as non-operating.
All assets required for the current day-to-day transaction of business are known as operating assets. In simple words, the assets that a company uses for producing a product or service are operating assets. These include cash, bank balance, inventory, plant, equipment etc.
All assets which are of no use for daily business operations but are essential for the establishment of business and for its future needs are termed as non-operational. This could include some real estate purchased to earn from its appreciation or excess cash in business, which is not used in an operation.
Understanding Total Assets and Net Assets
The meaning of total assets is truly reflected in the accounting equation as the sum total of liabilities and owner’s equity. While “Net Assets” is a term used to state the difference between total assets and total liabilities. Consequently, it can be noted that net assets and owner’s equity are virtually the same i.e. both represent the difference between “Total Assets” and “Total Liabilities”
Total Assets = Total Liabilities + Owner’s Equity
Net Assets = Total Assets – Total Liabilities
The following table will give you a clear picture of the types of assets:
|Current Asset||Fixed Asset||Tangible Asset||Intangible Asset||OperatingAsset||Non-operating
|Bank Balance||Road||Road||Patents||Bank Balance||Patents|