What is An Asset?
An asset represents a present economic resource of a company to which it has a right and an expectation that it will provide future benefit. Lets break that down further; assets are the “stuff” that the business owns or has rights to that will make them money in the future. For example, if you own a landscaping business then a law mower is an asset. The company owns it and has a right to it and the law mower will generate future income through landscaping services. To get a better picture of what assets are lets look at the different classifications and examples of assets.
Short Term Vs Long Term Assets
Assets are broadly classified into two categories, short term and long term assets. A short term asset (also referred to as a current asset) is an asset that is to be sold, converted to cash, or liquidated to pay for liabilities within one year. These include the following:
- Marketable Securities
- Accounts Receivable
- Prepaid Expenses
Long term assets (also referred to as non current assets) are assets that are not intended to be turned into cash or be consumed within one year of the balance sheet date. Long term assets include:
- Property, Plant and Equipment
- Long term investments
- Notes receivable in excess of one year
Rights to Future Benefits
The most obvious examples of assets are the “stuff” you see. You can see a business has machinery, buildings, inventory and property and can easily say, “that’s an asset”. But there are other types of assets that many students get confused about. These are the assets that you can’t see but they represent rights to future benefits.
For example, lets say you own that landscaping business and just finished a job for a customer. The customer is happy with the work and you give them an invoice. You did not actually receive payment so most students think there is no asset. However, since the business has a right to that payment and that payment represents a future benefit then the business in fact has an asset. This asset is called an account receivable. Lets look at another example.
You own a business and prepaid for advertising services for the next 2 years. You would think that this represents an expense for the business but it is in fact an asset. Since you did not yet receive the benefit of the advertising services it is considered a future benefit. Once that future benefit is used then the asset can be reclassified from an asset to an expense.
Tangible vs Intangible Assets
Tangible assets are the current and non current assets previously discussed. They are the backbone of the company providing the means to produce future goods and services. Intangible assets on the other hand are non-physical items that add to the company’s future worth. These include:
- Licensing Agreements
- Customer list
Balance Sheet Example
The above is an example of the asset section of the Balance Sheet. As you can see, the assets are separated from current and non current assets in order from most liquid to least liquid (liquid meaning how quickly it can be converted to cash).
John owns an eCommerce business where he buys and sells vintage merchandise. John has $10,000 worth of inventory at cost, $900 of customer receivables, $500 of credit card debt from purchasing inventory and $5,000 cash on hand. List John’s assets in order of liquidity from most liquid to least liquid.
- $5,000 cash on hand
- $900 customer receivables
- $10,000 inventory at cost