What is an asset?
An asset is a resource with monetary value that an individual, corporation, or country owns or controls with the expectation of future benefit. Assets are reported on a company’s balance sheet and are purchased or created to increase the value of the company or to benefit its operations. An asset is anything that can generate cash flow, reduce expenses, or increase sales in the future, whether it’s manufacturing equipment or a patent.
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Key Takeaways
- An asset is a resource with monetary value that an individual, corporation, or country owns or controls with the expectation of future benefit
- Assets are reported on a company’s balance sheet and are purchased or created to increase the value of the company or to benefit its operations
- An asset is anything that can generate cash flow, reduce expenses, or increase sales in the future, whether it’s manufacturing equipment or a patent.
Understanding Assets
An asset represents a company’s economic resource or access that other individuals or firms do not have. A right or other access is legally enforceable, which means that economic resources can be used at the discretion of a company. And can be prohibited or limited by an owner.
For an asset to be present, a company must possess a right to it as of the date of the financial statements. An economic resource is something that is scarce and has the ability to produce economic benefit by generating cash inflows or decreasing cash outflows.
Assets can be broadly categorized into short-term (or current) assets, fixed assets, financial investments, and intangible assets.
Types of Assets
Current Assets
Current assets are short-term economic resources that will be converted into cash within a year. Cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses are examples of current assets.
While cash is simple to value, accountants must reassess the recoverability of inventory and accounts receivable on a regular basis. Accounts receivable will be impaired if there is evidence that they may be uncollectible. Alternatively, if inventory becomes obsolete, businesses may write off these assets.
Fixed Assets
Fixed assets, such as plants, equipment, and buildings, are long-term resources. An adjustment for fixed asset ageing is made based on periodic charges known as depreciation, which may or may not reflect a fixed asset’s loss of earning power.
Depreciation is allowed under two broad methods under generally accepted accounting principles (GAAP).
The straight-line method assumes that a fixed asset loses value proportionally to its useful life. Whereas the accelerated method assumes that the asset loses value more quickly in the first years of use.
Financial Assets
Financial assets are investments in other institutions’ assets and securities. Stocks, sovereign and corporate bonds, preferred equity, and other hybrid securities are examples of financial assets. The value of financial assets is determined by how the investment is classified and the motivation behind it.
Intangible Assets
Intangible assets are financial resources that do not have a physical presence. Patents, trademarks, copyrights, and goodwill are examples of intellectual property. Intangible asset accounting differs depending on the type of asset, and they can be amortised or tested for impairment each year. To Know further about gold loan companies, click here.
