An asset can be described as a resource or item that provides future economic benefits to the individual, corporation, or country that owns it. Assets have long had a place in a company's balance sheet, but today take on a broader identity when associated with the broader financial sector. From financial assets to assets that provide future economic value, below we outline everything you need to know about assets.
What is an asset?
Assets can refer to an item or resource that holds economic value, with the individual, company, or country that owns it being able to expect future monetary benefits. Assets can be held to maintain liquidity or sold to make a profit. These assets are usually assigned a dollar value upon which their liquidity or potential profits can be judged.
Assets owned by an individual are referred to as personal assets, while assets owned by a company or corporation are referred to as business assets.
Assets are used to increase net worth, raise business value, and more. Assets can be physical or intangible, such as gold or Bitcoin. Individuals and companies alike use assets as a means to provide and prove solvency, financial health, and equity. They can be used as liquidity to secure loans or can be sold to make a profit. Business success probability is generally worked out by subtracting liability from total asset value.
An asset can be considered a resource that in the future can generate cash flow, whether it's manufacturing equipment or a patent.
Assets can be categorized into current assets, fixed assets, tangible and intangible assets, operating assets, and non-operating assets.
How do assets work?
Individuals, companies, and governments accumulate assets with the expectation that they will provide short-term or long-term economic gains in the future. Assets do not promise gains though, as assets can either appreciate or depreciate in value, with gains only realized after the sale. This volatility can affect the sale value and change the overall solvency of a person, corporation, or country.
Solvency implies that the assets held are enough to manage or pay back outstanding liabilities. Companies usually use a balance sheet, covering current assets, liabilities, and equity, to evaluate how the held assets suffice against their liabilities. But before we delve deeper into the broad topic of assets, let’s dissect the current most common types of assets.
Types of assets
There are 6 main examples of assets that can be broken down into the categories listed below. The definition of assets is broad so one asset may fit into one or more asset classification categories. These are the most popular types of assets.
Current Assets (business assets)
Current assets can quickly be converted into cash, otherwise referred to as liquid assets, and are used to pay bills or settle liabilities promptly. Some examples of current assets include but are not limited to cash and cash equivalents, accounts receivable, inventory, or prepaid expenses.
Fixed Assets
Fixed assets, otherwise referred to as non-current assets, are assets that are purchased for long-term use, more than 12 months usually, and are not likely to be converted quickly into cash. These assets hold future economic benefit. Some examples of fixed assets include land, buildings, or equipment.
Tangible Assets
Tangible assets refer to assets that you can see and touch, also known as physical assets. These types of assets would be considered as cash, inventory, buildings, stock, machinery, or furniture.
Intangible Assets
Intangible assets refer to an asset that lacks physical substance, the opposite of tangible assets, and can not be touched or seen. Types of intangible assets would be considered as intellectual property, patents, licenses, grants, and secret formulas.
Operating Assets
Operating assets refer to assets owned by a business for daily operations or to generate revenue through usage. Some examples of operating assets include but are not limited to inventories, patents, equipment, secret formulas, and licenses.
Non-operating Assets
Non-operating assets refer to assets that are not necessarily used for business activities but may still create profits in the future. Some examples of non-operating assets include vacant land, marketable securities, short-term investments, and long-term investments.
Definition of an asset
As already discussed, the definition of an asset is too broad, and even when broken down into categories does not captivate the true potential. While patents are considered an intangible asset, with rights usually stored digitally, it is also vital operating asset for some businesses.
Bitcoin is another example of an asset breaking barriers, considered an intangible asset, stored digitally. Bitcoin could also be referred to as a current asset, or liquid asset.
Inventory is a current, tangible, operating asset. It can be one or all at the same time. This just goes to show there is no one definition of an asset or asset type, but it is rather up to how the investor chooses to use said asset.
But it is important to remember that tangible assets can not be intangible assets. Current assets can not be fixed assets. And operating assets can not be non-operating assets. There may be some exceptions, but this is a general rule to remember.
Assets vs liabilities
Whether you are working out an entrepreneur's net worth, or a company's value, liabilities play a massive role in the solvency of an individual, cooperation, or country. When you minus liabilities from assets, you can work out Fund Balance, also referred to as Net Assets or Equity.
In order to figure out a company's fund balance, you would need to evaluate its balance sheet. Viewing their balance sheet depends on whether the company is private or public, with public companies being legally required to provide their balance sheets in annual reports.
To put it simply: Assets - Liabilities = Equity
Understanding assets and their economic value
The definition of assets is limitless, even the sapphire necklace you inherited from your grandmother could be considered a current and tangible asset. The value of the necklace could be profited from immediately, or you could wait for a sapphire shortage to claim even more.
The basics of assets within personal and professional lives differ, and we hope through this article you could come to a greater understanding of the differences and similarities.
Assets remain an item or resource that a person, business, or government can expect to generate a cash flow. Whether it be a fixed or current asset, the goal of acquiring assets is to eventually profit from them. Gold, Bitcoin, houses, cars, secret formulas, and patents are all classed as assets, rightfully so, as they have the ability to generate value in a cash equivalent.
Now that you know more about assets, and the value they are supposed to hold, do your own research and find an asset that fits your investment needs and wants.
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