Asset

In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be utilized to produce value and that is held by an economic entity and that could produce positive economic value. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset).[1] The balance sheet of a firm records the monetary[2] value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business.[1]

One can classify assets into two major asset classes: tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets.[3] Current assets include inventory, accounts receivable, while fixed assets include buildings and equipment.[4] Intangible assets are non-physical resources and rights that have a value to the firm because they give the firm an advantage in the marketplace. Intangible assets include goodwill, copyrights, trademarks, patents, computer programs,[4] and financial assets, including financial investments, bonds and stocks.

Formal definition

IFRS (International Financial Reporting Standards), the most widely used financial reporting system, defines: "An asset is a present economic resource controlled by the entity as a result of past events. [5] An economic resource is a right that has the potential to produce economic benefits." [6]

The definition under US GAAP (Generally Accepted Accounting Principles used in the United States of America): "Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events." [7]

Characteristics

Con 6[8] provides the following discussion of the nature of an asset:

An asset has three essential characteristics:
(a) it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows,
(b) a particular entity can obtain the benefit and control others’ access to it, and
(c) the transaction or other event giving rise to the entity’s right to or control of the benefit has already occurred.

This accounting definition of assets necessarily excludes employees because, while they have the capacity to generate economic benefits, an employer cannot control an employee.

Similarly, in economics, an asset is any form in which wealth can be held.

There is a growing analytical interest in assets and asset forms in other social sciences too, especially in terms of how a variety of things (e.g., personality, personal data, ecosystems, etc.) can be turned into an asset.[9]

Accounting

In the financial accounting sense of the term, it is not necessary to be able to legally enforce the asset's benefit for qualifying a resource as being an asset, provided the entity can control its use by other means.

The accounting equation is the mathematical structure of the balance sheet. It relates assets, liabilities, and owner's equity:

Assets = Liabilities + Capital (which for a corporation equals owner's equity)

Liabilities = Assets − Capital

Equity = Assets − Liabilities

Assets are listed on the balance sheet.[10] On a company's balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country.[11] Assets can be divided into e.g. current assets and fixed assets, often with further subdivisions such as cash, receivables and inventory.

Assets are formally controlled and managed within larger organizations via the use of asset tracking tools. These monitor the purchasing, upgrading, servicing, licensing, disposal etc., of both physical and non-physical assets.

Current assets

Current assets are cash and others that are expected to be converted to cash or consumed either in a year or in the operating cycle (whichever is longer), without disturbing the normal operations of a business. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets:

1. Cash and cash equivalents – it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts).
2. Short-term investments – include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).
3. Receivables – usually reported as net of allowance for non-collectable accounts.
4. Inventory – trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the "lower of cost or market" rule.
5. Prepaid expenses – these are expenses paid in cash and recorded as assets before they are used or consumed (common examples are insurance or office supplies). See also adjusting entries.

Marketable securities: Securities that can be converted into cash quickly at a reasonable price.

The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities.

Long-term investments

Often referred to simply as "investments". Long-term investments are to be held for many years and are not intended to be disposed of in the near future. This group usually consists of three types of investments :

1. Investments in securities such as bonds, common stock, or long-term notes.
2. Investments in fixed assets not used in operations (e.g., land held for sale).
3. Investments in special funds (e.g. sinking funds or pension funds).

Different forms of insurance may also be treated as long-term investments.

Fixed assets

Also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use to earn profit in a business. This group includes land, buildings, machinery, furniture, tools, IT equipment (e.g., laptops), and certain wasting resources (e.g., timberland and minerals). They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land assets). Accumulated depreciation is shown in the face of the balance sheet or in the notes.

These are also called capital assets in management accounting.

Intangible assets

Intangible assets lack physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises & licenses, goodwill, trademarks, trade names, etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill.

Websites are treated differently in different countries and may fall under either tangible or intangible assets.

Tangible assets

Tangible assets are those that have a physical substance, such as currencies, buildings, real estate, vehicles, inventories, equipment, art collections, precious metals, rare-earth metals, Industrial metals, and crops. The physical health of tangible assets deteriorate over time. As a result, asset managers use deterioration modeling to predict the future conditions of assets.[12]

Depreciation is applied to tangible assets when those assets have an anticipated lifespan of more than one year. This process of depreciation is used instead of allocating the entire expense to one year.[13]

Tangible assets such as art, furniture, stamps, gold, wine, toys and books are recognized as an asset class in their own right.[14] Many high-net-worth individuals will seek to include these tangible assets as part of their overall asset portfolio. This has created a need for tangible asset managers.

Wasting asset

A wasting asset is an asset that irreversibly declines in value over time. This could include vehicles and machinery, and in financial markets, options contracts which continually lose time value after purchase.[15] Mines and quarries in use are wasting assets.[16] An asset classified as wasting may be treated differently for tax and other purposes than one that does not lose value; this may be accounted for by applying depreciation.

Comparison: current assets, liquid assets and absolute liquid assets

Current assets	Liquid assets	Absolute liquid assets
Stocks
Prepaid expenses
Bills receivable	Bills receivable
Cash in hand	Cash in hand	Cash in hand
Cash at bank	Cash at bank	Cash at bank
Accrued incomes	Accrued incomes	Accrued incomes
Loans and advances (short term)	Loans and advances (short term)	Loans and advances (short term)
Trade investments (short term)	Trade investments (short term)	Trade investments (short term)

See also

• DIRTI 5

References

1. O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall. p. 272. ISBN 978-0-13-063085-8.
2. Siegel, J. G.; Dauber, N.; Shim, J. K. (2005). The Vest Pocket CPA. John Wiley & Sons. ISBN 978-0471708759. OCLC 56599007.There are different methods of assessing the monetary value of the assets recorded on the Balance Sheet. In some cases, the Historical Cost is used; such that the value of the asset when it was bought in the past is used as the monetary value. In other instances, the present fair market value of the asset is used to determine the value shown on the balance sheet.
3. J. Downes, J. E. Goodman, Dictionary of Finance & Investment Terms, Barron's Financial Guides, 2003
4. J. Downes, J. E. Goodman, Dictionary of Finance & Investment Terms, Barron's Financial Guides, 2003; and J. G. Siegel, N. Dauber & J. K. Shim, The Vest Pocket CPA, Wiley, 2005.
5. IFRS Conceptual framework paragraph 4.3 link: https://www.ifrs.org/issued-standards/list-of-standards/conceptual-framework/
6. IFRS Conceptual framework paragraph 4.4 link: https://www.ifrs.org/issued-standards/list-of-standards/conceptual-framework/
7. US GAAP Con 6.25 link: https://www.fasb.org/pdf/aop_CON6.pdf
8. https://www.fasb.org/pdf/aop_CON6.pdf
9. Birch, Kean (2016-08-10). "Rethinking value in the bio-economy: Finance, assetization and the management of value". Science, Technology, & Human Values. 42 (3): 460–490. doi:10.1177/0162243916661633. PMC 5390941. PMID 28458406.
10. "Balance Sheet - Definition & Examples (Assets = Liabilities + Equity)". Corporate Finance Institute. Retrieved 2019-12-03.
11. Intermediate Accounting, Kieso, et. al
12. "Piryonesi, S. M. (2019). The Application of Data Analytics to Asset Management: Deterioration and Climate Change Adaptation in Ontario Roads (Doctoral dissertation)".
14. Downes, John; Goodman, Jordan Elliot. Finance and Investment Handbook, Sixth Edition, Barron's Educational Series, Inc., 2003.
15. "Wasting Asset Definition". Investopedia. Retrieved 7 June 2020.
16. "wasting". Oxford English Dictionary (Online ed.). Oxford University Press. (Subscription or participating institution membership required.)