An asset is something that can be used to produce value by an individual person or company. There are several types, all of which can provide economic value. Moreover, they are something that is expected to provide a future economic benefit by increasing a business’s or person’s value.
Assets are recorded on a company’s balance sheets, along with the company’s liabilities, and used to show equity.
How Do Assets Work?
Assets can be anything that a company or person owns that has value. For example, this can include property, cash, trademarks, copyrights, patents, or investments. It can even be a loan that is owed to a person or company. Therefore, it is something that can provide a current, future, or potential economic benefit.
What Are the Basics of Assets?
A company’s assets should equal the sum of their liabilities added to their shareholder’s equity. This is represented on a company’s balance sheet. Financial documentation, such as a balance sheet, is important because it shows the date that a company acquired the asset.
What Is an Example of an Asset?
As we have learned, assets can be anything that holds value or puts money in your pocket. Some common examples include (but are not limited to):
- Accounts receivable
What Are Long-Term Assets?
Long-term assets are those that are expected to have an economic benefit beyond the 12 month financial cycle. They can be listed for many years on balance sheets along with current assets. An example would be a corporation that owns a large amount of real estate.
What Are Liquid Assets?
Liquid assets are expected to be easily and quickly converted into cash within a short amount of time. This can include securities, as well as cash. Additionally, they are listed on a company’s balance sheet along with their current assets. Something that can be considered as liquid is a stock.
What Are Illiquid Assets?
Illiquid assets are the opposite of liquid, in that they cannot be converted into cash quickly. They can be difficult to sell and can sometimes result in a financial loss. Examples of illiquid include real estate, collectibles (such as art), or penny stocks.
Types of Assets
There are many categories and subcategories of assets. Let’s review the variations and how they differ.
Simply stated, business assets are items that a business owns. This includes tangible items or intangible items. Also, this includes items that a business creates or can benefit from. However, business assets can change over time. They are listed on a company’s balance sheet as either current or non-current.
Personal assets include things that are owned by an individual person or household. In addition, they can be tangible or intangible. These can include cars, cash, jewelry, pensions, retirement plans, and stocks.
Fixed assets can include that of which a company does not intend on converting to cash within the year. Examples include property or buildings a company owns and equipment the company uses to generate income. Additionally, they are listed on the balance sheet as property, plant, and equipment (PP&E).
Current assets are the opposite of fixed, in that they are expected to be converted into cash within the financial year. A good example of current includes inventory, which is expected to be sold for cash within one year.
Non-current assets include those that are not expected to be converted into cash within the financial year. They are expected to take longer than one year to sell and can also be referred to as long-term. More importantly, non-current assets include fixed assets, such as PP&E.
Tangible assets are those that have a physical form with actual monetary value. They are listed on a company’s balance sheet and are usually the main form of assets to be included. Moreover, they can be either current or long-term assets and are recorded as so.
Intangible assets are the opposite of tangible, in that they do not hold a physical form. They are not often included on balance sheets. Additionally, these can include patents, copyrights, goodwill, and brand recognition.
What Is the Difference Between Assets and Liabilities?
Assets and liabilities, along with shareholder’s equity, are included in a company’s balance sheet. Simply put, assets are items that you or your company owns and can provide value. Liabilities are what is owed to other people or companies.
Liabilities can be separated into current and non-current, based on how long it could take to pay back. If a liability can be expected to be paid within the financial year, it would be considered current. However, if it will take longer than 12 months to pay back, it would be considered non-current.
Asset vs Liability
Examples of liabilities include the rent owed to use a building, money owed to a bank, money owed to suppliers, and payroll that a company owes to its employees. Also, it can include a good or service owed to customers.
While assets can include what a company owns or is owed, liabilities are what a company owes others. In short, a company’s assets should equal the sum of their liabilities and shareholder’s equity. This is represented on their balance sheet using the following equation:
Assets = Liabilities + Shareholder’s Equity
Understanding Your Total Assets
Understanding assets does not have to be difficult. While there are many categories, the important thing to understand is that assets, in general, are expected to provide economic value to a person or company. In conclusion, they can be short or long term, physical or non-physical, and should equal a company’s liabilities and equity.
It may be best to review your assets with a financial advisor. They can provide you with information on how to properly list and keep track of your assets and liabilities and help answer any of your questions.