All About Assets

An asset is defined as something of current or future value owned by the company. Assets are shown on the balance sheet, which gives a snapshot of a company’s financial position at one point in time. Any time a business spends money, they are creating an expense or an asset in the financial statements.

Three characteristics of assets:

In order to be considered a true asset, the following must all be true:

1. There is probable future benefit that the asset contribute directly or indirectly to future net cash flows, that is it generates revenue for the company. (Or in the case of a non-profit, the ability to provide services.
2. The company controls access to the benefit. In other words, they own it or have rights to it similar to ownership.
3. The transaction or event giving rise to the entity’s right to, or control of, the benefit has already occurred. In most cases, this means they have purchased the asset.

Assets are sometimes referred to as the resources of the company. However, it’s important to understand the three characteristics above.

Types of Assets

Current assets are generally assets that can be converted to cash in one year or less. They include cash, short term investments, receivables, and inventories. One of a companies largest assets is often accounts receivable. Prepaid expenses are services that are paid for upfront, but benefit the company over a period of time. Subscriptions to trade journals, annual dues to professional organizations, and insurance premiums are examples of prepaid assets.

Long term investments include investments intended to be held longer than one year. This would also include investments in subsidiary companies.

Fixed assets are things purchased by a company for the purpose of creating revenue. This is in contrast to the asset of inventory, which purchased to be resold in some format. Fixed assets include land, buildings, machinery, and other equipment (including laptops – although those can probably be expensed immediately under Section 179 for accelerating depreciation). Fixed assets are also known as capital assets. When something is purchased to be a fixed asset, it is said to be capitalized.  

Intangible assets are those that lack physical substance. These can be difficult to value. Intangible assets include patents and copyrights, franchise agreements, and trademarks. A special kind of intangible asset, goodwill, is created when one company acquires another for more than the stated value of the company ‘on paper’.

In most cases assets are recorded and shown on the balance sheet at original acquisition cost (historical cost). However, recently there have been changes to accounting rules that require assets to be ‘written down’ to actual market value in some cases.

Image Credit: Ed Yourdon, Flickr