Meaning

An Asset is an item owned or controlled by a business. It has economic value that can be realised by either converting it into cash or generating income for the company. Examples of an asset include the following:

• Cash and cash equivalents
• Furniture
• Machinery
• Investments
• Property
• Factory
• Patents
• Trademark and more

What are the features of an Asset?

The main features of an asset are as follows:

• Ownership: Assets signify ownership or control by the business for purposes of production. The company can sell these assets in exchange for cash and cash equivalents.
• Economic Value: Every asset has an economic value, and this asset can also be exchanged or sold in the market.
• Resource: Assets are a resource that can generate revenue for the business. For example, machinery can enhance the production capacity of the firm resulting in economic benefits.
• Maintenance Cost: Most assets have a maintenance or repair cost. Regular maintenance helps the asset to run smoothly and not hamper the business operations. If an asset breaks down temporarily or permanently, it leads to substantial revenue losses for the organisation.
• Depreciation: Depreciation is a reduction in the book value of an asset due to factors like wear and tear or obsolescence. It is an ongoing process that terminates only at the end of an asset’s useful life.
• Estimated useful life: An asset has an approximate life span during which it can function efficiently. For items like machinery, which are essential for the production of goods, the estimated life is either known to the vendor (who sells the asset to the company) or a qualified professional (who calculates the life span based on the asset’s present condition and estimated usage)
• Scrap Value: An asset starts to depreciate over some time due to wear and tear or obsolescence. After a few years, the asset becomes non-functional or obsolete and has no use for the business. But it still has some salvage value which the company can realise by selling it to a scrap dealer. This value is known as the scrap value of an asset. The scrap value generated by selling this asset is an indirect income for the business.

Classification of Assets

Assets get divided into different groups based on specific criteria. They are as follows:

• Convertibility into cash: Here, an asset is classified based on the ease of exchanging cash or cash equivalents. They are current assets or fixed assets. Current assets can be converted into cash and cash equivalents generally within a year. They are also known as liquid assets. Cash, cash equivalents, inventory, short-term deposits, office supplies, accounts receivables, etc., are examples of current assets. Fixed or Non-Current Assets are those which the firm cannot readily convert into cash and cash equivalents. Land, machinery, building, equipment, patents, trademarks, etc., are examples of Fixed Assets.
• Physical Existence: This criterion divides assets into two groups: tangible assets or intangible assets. Tangible Assets have a physical form and can be used as collateral to obtain loans for the business. Land, Machinery, Building, Equipment etc., are examples of tangible assets. On the other hand, intangible assets do not have a physical form, but they can generate revenue for the business. Goodwill, Copyrights, trademarks, patents, licenses and permits are some examples of Intangible Assets.
• Usage: This category divides assets into operating assets or non-operating assets. Operating Assets are those assets that a firm needs for the regular operation of their business to generate revenue. Inventory, building, accounts receivable, equipment, machinery, Patents, goodwill, copyrights etc., are examples of operating assets. The firm does not need Non-Operating Assets for regular business operations, and it can also generate revenue. Short-term investments, vacant land and property, marketable securities, Interest income, etc., are examples of a Non-Operating Asset.

Difference between Assets and Liabilities

While assets are items that have an economic value and generate revenue for the business, Liabilities are debts or obligations for a company that it owes to outsiders. Both are present in the Balance Sheet, but there are essential differences between them which are as follows:

Conclusion

Assets are an essential part of any business, and they are needed to carry on production activities for the firm, which will bring in revenue. It can also generate income by selling or leasing to other parties.

Also See

• Fixed Assets vs Current Assets
• Current Liabilities