What is an Asset?

An asset is a resource owned or controlled by a business or an individual that has economic value and is expected to provide future benefits. An asset can include cash, accounts receivable, inventory, property, equipment, investments, intellectual property, and other resources that are expected to provide future economic benefits. Assets can either be tangible, which includes cash, stocks, buildings, and machinery, or intangible, including patents, copyrights, trademarks, and goodwill.

Assets in a business organization can be found on the balance sheet of the company. Assets may earn income, aid in the operations of the firm, lower the cost of doing business, and also have economic value that is convertible to cash.

Types of Assets

Assets are commonly classified based on their liquidity, physical form, and financial nature. 

By liquidity (ease of conversion into cash):

• Current assets: Assets anticipated to be realized or used up in operations within one year, for example, cash, accounts receivable, inventory, and prepaid expenses.
• Non-current assets: Long-term assets that last more than one year, including property, plant and equipment, and vehicles.

By form:

• Tangible assets: Physical objects of verifiable worth, for instance, machinery, office equipment, or real estate.
• Intangible assets: Non-physical assets of economic value, for example, copyrights, patents, goodwill, etc.

By Financial Nature:

• Financial assets: Resources that represent a financial claim or investment and can generate economic benefits. Examples include cash, stocks, bonds, investments, and accounts receivable. 

How are Assets Valued?

Since it may be challenging to estimate the value of the asset, businesses generally use one of several methods of valuation:

• Cost-based method: Valuation of the asset is done based on the initial cost of purchase and depreciated accordingly (this applies mostly to tangible assets).
• Market-based method: Compares the asset with similar assets that exist on the market (applies usually to stocks, bonds, and real estate).
• Income-based method: Asset valuation based on its projected income stream.

Why Are Assets Important for a Business?

Assets provide the resources a business needs to operate, generate revenue, and grow. Also, assets may help a firm deal with its daily activities, save money, and stay financially sound. The value and composition of a company’s assets are also important indicators of its financial condition and ability to meet its liabilities. 

Assets are presented on the balance sheet and form the following accounting equation:

                      Assets= Liabilities + Equity

What is Asset Depreciation?

Asset depreciation is the process by which the cost of a tangible fixed asset is allocated over its useful life. Some of the assets that are often depreciated are machinery, vehicles, buildings, and equipment. The different methods of depreciation include straight-line depreciation, declining balance depreciation, and units of production depreciation.

Not all assets are depreciated. Land, for instance, is not depreciated since it does not have a limited useful life.

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