What Is an Asset?

What Is an Asset?

Let me tell you directly: an asset is anything that has monetary value and can produce income for its owner or could do so if used or sold.

As a resource, whether tangible or intangible, it holds value that you can exploit. It might generate income like rental fees, or you could sell it for a profit, such as stocks or jewelry.

For you as an individual or for your family, assets include things like your home, savings, investments, and personal possessions with intrinsic value.

In a company, assets get categorized into current ones like inventory for immediate use, fixed ones like a factory and equipment, financial ones such as stock investments, and intangible ones like goodwill.

Key Takeaways

Assets are simply things that have value. They may produce income now or in the future. They can appreciate in value over time. In business, they generate cash flow, reduce expenses, or improve sales.

How Assets Work

You probably think of assets as items of value that you can convert to cash later, and they might produce income or appreciate until then. These can be financial assets like stocks, bonds, and mutual funds, or physical ones like a home or art collection.

For businesses, an asset has the potential to generate cash flow. It could reduce expenses or improve sales, whether it's tangible like manufacturing equipment or a fleet of trucks, or intangible like a patent or trademark.

A company must have a right to the asset as of the date of its financial statements for it to count as one of its assets.

Types of Assets

Assets appear on a company's balance sheet and fall into broad categories: current or short-term assets, fixed assets, financial assets, or intangible assets.

Current Assets

Current assets are short-term resources expected to turn into cash or be consumed within a year. They include cash and equivalents, accounts receivable, inventory, and prepaid expenses.

Valuing cash is straightforward, but accountants reassess inventory and receivables periodically. If a receivable looks uncollectible, it's impaired. Companies write off obsolete inventory.

Some assets get recorded at historical cost, which is the original purchase price plus expenses like delivery and setup.

Fixed Assets

Fixed assets last more than a year, like plants, equipment, and buildings. We make depreciation adjustments as they age to allocate their cost over time. This may or may not match their actual loss in earning power.

GAAP allows various depreciation methods. The straight-line method spreads value loss evenly over useful life. Accelerated methods front-load the loss in early years.

Useful life varies: IRS sets seven years for office furniture under GDS, five years for cars and trucks.

Financial Assets

Financial assets include stocks, bonds, and securities. They're liquid and valued at current market prices, unlike fixed assets.

Intangible Assets

Intangible assets lack physical presence but provide economic value, like patents, trademarks, copyrights, and goodwill. We amortize them over their useful life, similar to depreciating fixed assets.

Assets vs. Liabilities

An asset is something of economic value you own or control. A liability is the opposite—something you owe, like loans, taxes, or accounts payable.

Explain Like I'm 5

An asset is something valuable you own or that's owed to you. If you lend money, that loan is your asset because they have to pay you back. For them, it's a liability.

What Are Examples of Assets?

Personal assets include homes, land, securities, jewelry, artwork, gold, silver, or checking accounts. Business assets cover vehicles, buildings, machinery, equipment, cash, receivables, patents, and copyrights.

What Are Non-Physical Assets?

Non-physical or intangible assets provide economic benefits without being touchable. They include intellectual property like patents or trademarks, contractual obligations, royalties, goodwill, brand equity, and reputation.

Is Labor an Asset?

No, labor is work done by people for wages or salary. It's distinct from assets, which are considered capital.

How Are Current Assets Different From Fixed or Noncurrent Assets?

We categorize assets by usage time. Current assets get sold or used within a year. Fixed or noncurrent assets last longer than a year and depreciate over time, unlike easily liquidated current assets.

The Bottom Line

Assets are anything valuable owned by individuals, businesses, or entities. Different types get treated differently for tax and accounting. Generally, assets are good to have, liabilities less so.