To determine the value of a business or a person, it’s important to consider their assets, which are resources capable of generating economic benefit in the future.
What Is an Asset?
An asset is anything that belongs to a company or to an individual. It can be sold for cash. Typically, assets produce income or provide value to their owners. In financial accounting, assets are economic resources.
A value-creating asset can be either a physical object or an intangible concept. These assets have positive and tangible value to their owners.
Additionally, assets must also be convertible into cash, which is also considered an asset. Based on accountants and accounting processes, there are several types of assets. Intangible assets, current assets, or long-term assets may all be included.
How Do Assets Work?
Individuals, businesses, and the government can accumulate assets in hopes of gaining economic benefits in the future. Assets can appreciate (or increase) in value, or depreciate (or decrease) in value, which alters the overall solvency of the individual or company.
A company is solvent if its assets are sufficient to cover its outstanding liabilities. Balance sheets show a company’s assets, liabilities, and shareholders’ equity, as well as how their assets compare to their liabilities. The overall financial health of a company can be determined using this method.
An individual’s personal assets are items with present or future value. Examples of personal assets can include:
- Property or land and any structure permanently affixed to it
- Cash and cash equivalents, savings accounts, checking accounts, retirement accounts, Treasury bills, certificate of deposits
- Personal property— Cars, antiques, art collections, electronics, jewelry
- Investments— annuities, bonds, the cash value of life insurance policies, pensions, retirement plans, stocks
You calculate your net worth by subtracting your liabilities from your assets. The assets you own are your assets, and the liabilities you owe are your liabilities. A positive net worth indicates that your assets exceed your liabilities; a negative net worth indicates that you owe more than your assets.
In addition to helping people get loans and counting towards their net worth, personal assets can do much more. They can also generate income for their owners. Interest is accrued on bank and savings accounts. Property owners can lease or rent out their property. This brings in rent or lease fees.
An asset is something of value that sustains production and growth for a company. As well as intangibles such as patents, royalties, and other intellectual property, a business’ assets can also include machines, property, raw materials, and inventory.
A balance sheet not only lists a company’s assets, but also shows how those assets are financed, whether by debt or equity. A balance sheet shows how efficiently a company’s management uses its resources.
On a typical balance sheet, there are two types of assets.
Assets that can be converted into cash within one fiscal year or one operating cycle are current assets. Current assets are used for day-to-day operations and investments.
Examples of current assets include:
- Cash and cash equivalents: Treasury bills, certificates of deposit, and cash
- Marketable securities: Debt securities or equity that is liquid
- Accounts receivables: Money owed by customers to be paid in the short-term
- Inventory: Goods available for sale or raw materials
Long-term assets or non-current assets, are fixed assets. Fixed assets with a physical substance are recorded on the balance sheet as property, plant, and equipment (PP&E). Intangible fixed assets are long-term assets without a physical substance, such as licenses, brand names, and copyrights.
Examples of fixed assets include:
- Vehicles (such as company trucks)
- Office furniture
Non-current assets (like fixed assets) cannot be readily converted into cash to meet short-term operational expenses or investments. Conversely, current assets will be liquidated within one fiscal year or one operating cycle.
Assets vs. Liabilities: What’s the difference?
Assets should never be confused with liabilities. Assets create positive cash flow, which is value or money that enters the accounts of a business, organization, or individual.
Liabilities are obligations that must be paid and create negative cash flow or drain money from the accounts of a business, person, or organization.
An example of the difference between the two: Assets are houses that are rented out and produce more rental income each month than the expenses, interest, and maintenance of the houses. Liabilities would be homes that have payments due each month and do not provide an income stream to effectively offset that.