What is a Business Asset?
Let me explain what a business asset really is. It's any item of value that your company owns, and these can cover a wide range of categories. You'll find physical, tangible goods like vehicles, real estate, computers, office furniture, and other fixtures, or even intangible items such as intellectual property. I want you to understand that these are recorded on the balance sheet at their historical cost.
Key Takeaways
- A business asset is a piece of property or equipment purchased exclusively or primarily for business use, and it can also include intangible items like intellectual property.
- Business assets are itemized and valued on the balance sheet, listed at historical cost and in order of liquidity.
- Most business assets can be written off and either depreciated or expensed under section 179 in the year of purchase.
- Business assets are divided into two sections: current assets and non-current assets.
- The value of business assets can be determined by an appraiser.
How Business Assets Work
You need to know how business assets function in practice. They are itemized and valued on the balance sheet, which you can find in the company's annual report. These are listed at historical cost, not market value, and they appear as items of ownership. Most of these assets can be written off as an expense on the income statement, either as one large expense in the year of purchase or through depreciation, which spreads the cost over time. Some large, expensive assets may qualify to be expensed entirely in the year of purchase under section 179. Assets are listed in order of liquidity, meaning how easily they can be bought or sold in the market without affecting their price.
Important Note on Business Asset Accounting
I have to emphasize that business asset accounting is arguably one of the most important jobs for company management. Investors use a financial ratio called return on net assets (RONA) to determine how effectively companies are putting their assets to work.
Special Considerations
Let's dive into some special considerations. Business assets are divided into two sections on the balance sheet: current assets and non-current assets. Current assets are those that will be turned into cash within one year, such as marketable securities, cash, inventory, and receivables—debts owed to your company by customers for goods or services delivered but not yet paid for. These might only have value for a short time, but they are still treated as business assets.
Current Assets Vs. Non-Current Assets
On the other hand, non-current assets, or long-term assets, are less liquid and expected to provide value for more than one year. This means your company doesn't intend to sell or convert them in the current year. These are generally referred to as capitalized assets because the cost is capitalized and expensed over the asset's life through depreciation. This includes items like property, buildings, and equipment.
Depreciation and Amortization of Business Assets
Tangible or physical business assets are depreciated, while intangible ones are amortized, which is the process of spreading the cost over the asset's useful life. When you amortize or depreciate expenses, it helps tie the asset's costs to the revenues it generates. Depreciation is calculated by subtracting the asset's salvage value or resale value from its original cost. Then, the difference is divided by the useful life of the asset. For example, if a truck has a useful life of 10 years, costs $100,000, and has a salvage value of $10,000, the depreciation expense is $100,000 minus $10,000 divided by 10, or $9,000 per year. In other words, instead of writing off the entire amount, capitalized assets are expensed by a fraction each year.
Valuing Business Assets
The value of business assets varies and can change over time. Many current, tangible assets like vehicles, computers, and machinery tend to age and may become obsolete as newer technologies emerge. Financial institutions often use return on average assets (ROAA), which is the blended value of all assets, to rate a company. Companies can spend money to buy new assets or improve existing ones—this is known as capital addition, and these capital expenditures (CapEx) are recorded on the balance sheet. When you want to use an asset as collateral or to substantiate depreciation deductions, you can get them valued by an appraiser.
Other articles for you
An overcast is a forecasting error where estimates exceed actual results, often due to incorrect inputs or unforeseen events.
Pareto efficiency is an economic state where resources are allocated so that no one can be improved without harming another.
Defensive stocks offer stable earnings and dividends regardless of market conditions, providing lower risk but potentially smaller gains.
Schedule K-1 is a federal tax form used to report income, losses, and dividends from pass-through entities like partnerships, S corporations, and trusts to their stakeholders.
Mortgage bonds are secured investments backed by real estate that offer safety and income but carry risks, as seen in the subprime crisis.
The money market is a financial sector focused on short-term borrowing and lending with high safety and low returns.
A void contract is an agreement that is legally invalid from the start due to fundamental flaws, unlike voidable contracts which can be enforced or voided.
The industry life cycle describes the four stages—introduction, growth, maturity, and decline—that industries go through, influencing strategies for companies and investors.
A bull trap is a false rally in a declining market that traps buyers into losses when the price reverses.
A transaction is an exchange of money for goods or services, recorded differently in accounting based on accrual or cash methods.