Assets are resources a business uses to operate and generate revenue. It means something that a business has purchased, owns, and controls. This could be something tangible, like machinery used to manufacture products, or intangible, like a patent for technology.
An asset has measurable value and is expected to provide future economic benefit for the business. Assets play a crucial role in a company's financial health and performance. They are important to help measure a company's value and potential to generate profit. Just by having a look at the value of assets in a company’s balance sheet, you can estimate a company’s worth.
Types of Assets
Assets are essential for a company's ability to function, expand, and remain competitive. They can be used to secure loans, attract investors, and provide a buffer against unexpected expenses. Based on their nature and ability to be converted into cash, assets are categorised into the following types:
Assets that can be converted into cash or used up within a relatively short period, usually within a year, are called current assets. They are considered part of a company's short-term operations and are vital for its day-to-day functioning. Current assets provide the company with liquidity or easily turn into cash to cover immediate financial needs.
Fixed assets, also known as non-current assets or tangible assets, are long-term resources that a company owns and uses to support its operations over an extended period, typically more than a year. It is a long-term physical asset used for generating income, rather than for sale as part of normal operations. Depreciation is calculated on fixed assets to make up for the wear and tear caused by these assets over time. An example of a fixed asset is plant and machinery.
Intangible assets are valuable resources that a company owns or controls, but they lack a physical presence. Unlike tangible assets, which you can touch and see, intangible assets are more abstract and are often associated with intellectual property, brand recognition, and other non-physical factors that contribute to a company's value and competitive advantage.
Financial assets are tradable instruments or contracts that represent ownership of an entity's claim on its financial value. Financial assets are traded on various financial markets, including stock exchanges, bond markets, and commodities markets. These assets allow businesses to potentially earn returns through capital appreciation, interest payments, or dividends.
Examples of Assets
- Current Asset: Inventory, Cash, Short-Term Investments, Accounts Receivable
- Fixed Assets: Properties like houses, apartments, or land
- Intangible Assets: Patents, copyrights, trademarks, Goodwill
- Financial Assets: Cash and Equivalents, stocks, Bonds, Debentures etc.
- Business Assets: Equipment, inventory, and accounts receivable
Accounting provides various formulae to calculate the assets of a business.
Total Assets = Liabilities + Equity
This formula considers that assets are funded either by debts (liabilities) or by the owner's investment (equity).
Net Assets = Total Assets - Total Liabilities
Net assets represent the value left over for the owners after all debts are subtracted from the total assets.
Current Assets = Cash + Marketable Securities + Accounts Receivable + Inventory + Prepaid Expenses
These are assets that are expected to be converted into cash or used up within a year.