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Asset is a word that is often used and seldom defined. One can be an asset to their family for their kindness or great impersonation skills, but an accountant wants to see something more concrete. In financial terms, an asset is anything that might create income for you in the future. Your house, your company's fleet of trucks, or your country's GDP are all excellent examples of real assets.
An asset is any resource or item that can be sold or used to create benefit or income for a person, company, or country. Assets are often used as a marker of a business’s financial health and to determine the net worth of a company, person, or country. Several different types of assets are categorized by when they convert to cash, their physical form, and how they are used.
While the term asset can also be used colloquially to mean a benefit, in accounting terms, assets have quantifiable value that is recorded on a balance sheet. A list of assets may be used to give an accurate picture of a company’s viability if they need to borrow money or present themselves for financial review.
Assets are the fuel a company, country, or person uses to power themselves economically. For instance, if a company has inventory that it can sell for a profit, they have an asset. Simply stated, an asset is something that can be sold or traded for economic benefit in the future.
Types of assets
Although most people think of assets as products that companies can sell for gain, they can come in many forms. Here are the six primary types of assets as determined by three criteria–physical type, convertibility, and usage.
There are two types of assets determined by physical type: tangible and intangible.
- Tangible assets are what most people think of when they think of assets–physical items that can be sold or liquidated for financial gain. Inventory, property, plant, and equipment (PP&E), raw materials, or office supplies would be considered tangible assets.
- Intangible assets are not physical items but theoretical assets that allow the company to make money through their use. Copyrights, patents, and right of use could all be considered intangible assets. The ability to produce items or services based on proprietary technology or knowledge can be a huge revenue driver for a company.
For example, Amgen, a pharmaceutical company, holds the patent for Otezla, a plaque psoriasis drug. Having the patent means that they are the sole manufacturers of the drug, and they alone can profit off of its sales. The patent is considered an asset.
Convertibility is the second way to categorize assets. Convertibility breaks down into two types of assets–current and fixed.
- Current assets will be liquidated for cash in less than a year. Inventory, cash or cash equivalents, office supplies, and marketable securities are considered current assets.
- Fixed assets are more difficult to convert to cash, like real estate, manufacturing equipment, patents, or trademarks. For tangible assets that are also fixed assets, their value may depreciate over time. On a balance sheet, fixed assets may be depreciated over time to account for the cost of maintenance and repair. For intangible assets, they may be amortized.
The last category is how assets are used. They fall into operating assets and non-operating assets.
- Operating assets are integral to how a business runs. If a company sells garden gnomes, its inventory of garden gnomes is essential to their function. Similarly, cash, the equipment needed to produce the garden gnomes, copyrights on designs, or patents on specialized features are operating assets.
- Non-operating assets are still valuable, but the company could exist without them. These include vacant land, interest income from a deposit account in the name of the parent company, and short-term investments. Non-operating assets tend to be side investments intended to diversify income streams or put profits in a safe place until needed.
What are examples of personal assets?
Although assets are commonly discussed in business accounting, personal assets are also important. Personal assets can include real estate, art, antiques, jewelry, electronics, investment accounts, deposit accounts, and other items that have resale value.
Personal assets are often used to determine net worth. To find net worth, you must add all the value of all assets held minus any liabilities such as mortgages, car payments, or other debt. People often talk about assets when discussing divorce proceedings or filing for bankruptcy. In the case of bankruptcy, all assets would be liquidated to try to pay back debt before starting over again financially.
What are examples of business assets?
Depending on the type of business, there can be many different types of assets. The easiest to visualize is physical inventory. A big box store counts their items as assets because they sell them for profit. But not only is the inventory an asset, but so is the building where they are sold. That name is an asset if they offer a generic store brand. Any large equipment they own to stock or clean the store, such as a forklift or industrial floor cleaner, would also be an asset.
What are examples of country assets?
Although countries don’t turn in balance sheets, they still have assets that determine their wealth. Gross domestic product is the formula most economists use to assess the wealth of a country. It is the sum of sales taxes, depreciation, net foreign factor income, and national income, including wages, rent, interest, and profits.
Some economists, including the World Bank, advocate more updated metrics for determining wealth. They suggest using the value of human capital, natural renewable resources, and resources built by humans, such as technology, architecture, and machines.
Why are assets important?
Assets are often used as a measuring stick for the value of a company or estate. There are several instances where assets may be used beyond their ability to be sold or converted into cash.
- A prenuptial agreement: Assets may be defined to establish what each party comes into the marriage with and what they may receive in the case of divorce.
- A bankruptcy: Assets may be liquidated to raise money to pay off bad debt. That could mean selling a house, cars, jewelry, art, or other valuables.
- Applying for a loan: Your assets can be used as collateral when applying for a loan. A home equity loan borrows against an asset–your home’s equity–to give you cash for other purposes. You’ll be an attractive candidate for lending if you have more assets than liabilities.
- Investments: In a business setting, having positive assets may entice investors to fund future projects or buy ownership stakes in your company.
- Reducing tax liability: For small businesses, assets may be a deductible expense, although they may be depreciated in certain situations.
Assets vs. income
It can be easy to confuse assets with income. Income is money coming in now, whereas assets are expected to generate potential revenue in the future. Likewise, some things you expect to be considered an asset may differ. For example, human labor is not considered an asset because you must pay wages for labor. Outflowing labor wages cut into the profit that the work itself might produce.
Asset key takeaways
Ownership of assets means the possessor has the potential to make money in the future, whether from selling a physical object like a product or real estate, or by liquidating an investment account or deposit account. An entity’s assets may be used as a health metric for its financial life. For companies, in particular, assets are vital in securing credit and future investments.