Asset

In financial accounting, an asset is an economic resource. Anything tangible or

intangible that is capable of being owned or controlled to produce value and that is
held to have positive economic value is considered an asset. Simply stated, assets
represent value of ownership that can be converted into cash (although cash itself
is also considered an asset).[1]

The balance sheet of a firm records the monetary[2] value of the assets owned by the
firm. It is money and other valuables belonging to an individual or business.[1] Two
major asset classes are tangible assets and intangible assets. Tangible assets
contain various subclasses, including current assets and fixed assets.[3] Current
assets include inventory, while fixed assets include such items as buildings and
equipment.[4]

Intangible assets are nonphysical resources and rights that have a value to the firm
because they give the firm some kind of advantage in the market place. Examples of
intangible assets are goodwill, copyrights, trademarks, patents and computer
programs,[4] and financial assets, including such items as accounts receivable,
bonds and stocks.

Formal definition

An asset is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity[5] (Framework Par
49a).

Asset characteristics

Probably the most accepted accounting definition of asset is the one used by the
International Accounting Standards Board.[6] The following is a quotation from the
IFRS Framework: "An asset is a resource controlled by the enterprise as a result of
past events and from which future economic benefits are expected to flow to the
enterprise."[7]

This means that:

 The probable present benefit involve a capacity, singly or in combination

with other assets, in the case of profit oriented enterprises, to contribute
directly or indirectly to future net cash flows, and, in the case of not-for-
profit organizations, to provide services;
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  The entity can control access to the benefit;
 The transaction or event giving rise to the entity's right to, or control of, the
benefit has already occurred.

Employees are not considered assets like machinery is, even though they can
generate future economic benefits. This is because an entity does not have
sufficient control over its employees to satisfy the Framework's definition of an
asset.

Similarly, in economics an asset is any form in which wealth can be held.

Assets in accounting

In the financial accounting sense of the term, it is not necessary to be able to legally
enforce the asset's benefit for qualifying a resource as being an asset, provided the
entity can control its use by other means.

The accounting equation is the mathematical structure of the balance sheet. It

relates assets, liabilities, and owner's equity:

Assets = Liabilities + Capital (where Capital for a corporation equals

Owner's Equity)
Liabilities = Assets - Capital
Capital = Assets - Liabilities

That is, the total value of a firm's Assets are always equal to the combined value of
its "equity" and "liabilities."

Assets are listed on the balance sheet. In a company's balance sheet certain
divisions are required by generally accepted accounting principles (GAAP), which
vary from country to country.[8] Assets can be divided into e.g. current assets and
fixed assets, often with further subdivisions such as cash, receivables and
inventory.

Assets are formally controlled and managed within larger organizations via the use
of asset tracking tools. These monitor the purchasing, upgrading, servicing,
licensing, disposal etc., of both physical and non-physical assets.

Current assets

Current assets are cash and other assets expected to be converted to cash or
consumed either in a year or in the operating cycle (whichever is longer), without
disturbing the normal operations of a business. These assets are continually turned
over in the course of a business during normal business activity. There are 5 major
items included into current assets:

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 1. Cash and cash equivalents — it is the most liquid asset, which includes
currency, deposit accounts, and negotiable instruments (e.g., money
orders, cheque, bank drafts).
2. Short-term investments — include securities bought and held for sale in
the near future to generate income on short-term price differences (trading
securities).
3. Receivables — usually reported as net of allowance for noncollectable
accounts.
4. Inventory — trading these assets is a normal business of a company. The
inventory value reported on the balance sheet is usually the historical cost
or fair market value, whichever is lower. This is known as the "lower of cost
or market" rule.
5. Prepaid expenses — these are expenses paid in cash and recorded as
assets before they are used or consumed (common examples are insurance
or office supplies). See also adjusting entries.

Marketable securities: Securities that can be converted into cash quickly at a

reasonable price.

The phrase net current assets (also called working capital) is often used and refers
to the total of current assets less the total of current liabilities.

Long-term investments

Often referred to simply as "investments". Long-term investments are to be held

for many years and are not intended to be disposed of in the near future. This
group usually consists of three types of investments:

1. Investments in securities such as bonds, common stock, or long-term notes.

2. Investments in fixed assets not used in operations (e.g., land held for sale).
3. Investments in special funds (e.g. sinking funds or pension funds).

Different forms of insurance may also be treated as long term investments.

Fixed assets

Also referred to as PPE (property, plant, and equipment), these are purchased for
continued and long-term use in earning profit in a business. This group includes as
an asset land, buildings, machinery, furniture, tools, IT equipment, e.g., laptops,
and certain wasting resources e.g., timberland and minerals. They are written off
against profits over their anticipated life by charging depreciation expenses (with
exception of land assets). Accumulated depreciation is shown in the face of the
balance sheet or in the notes. An asset is an important factor in a balance sheet.

These are also called capital assets in management accounting.

Intangible assets
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Intangible assets lack of physical substance and usually are very hard to evaluate.
They include patents, copyrights, franchises, goodwill, trademarks, trade names,
etc. These assets are (according to US GAAP) amortized to expense over 5 to 40
years with the exception of goodwill.

Websites are treated differently in different countries and may fall under either
tangible or intangible assets.

Tangible assets

Tangible assets are those that have a physical substance, such as currencies,
buildings, real estate, vehicles, inventories, equipment, and precious metals.

Comparison: current assets, liquid assets and absolute liquid

assets

Current assets Liquid assets Absolute liquid assets

Stocks
Prepaid expenses
Bills receivable Bills receivable
Cash in hand Cash in hand Cash in hand
Cash at bank Cash at bank Cash at bank
Accrued incomes Accrued incomes Accrued incomes
Loans and advances (short term) Loans and advances (short term) Loans and advances (short term)
Trade investments (short term) Trade investments (short term) Trade investments (short term)

Definition

asset ˈæset noun [countable]

1 usually plural something such as money or property that a person or company

owns

The business has assets totalling £5.1 million.

2 a major benefit

Youth is a tremendous asset in this job.

asset to He is a definite asset to the team.

Macmillan English Dictionary for Advanced Learners CD-ROM 2nd

Edition. CD-ROM © Macmillan Publishers Limited 2007. Text © A&C
Black Publishers Ltd 2007.

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References

1. Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in

action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall.
p. 272. ISBN 0-13-063085-3.
2. J. G. Siegel, N. Dauber & J. K. Shim, "The Vest Pocket CPA", Wiley,
2005.There are different methods of assessing the monetary value of the
assets recorded on the Balance Sheet. In some cases, the Historical Cost is
used; such that the value of the asset when it was bought in the past is used
as the monetary value. In other instances, the present fair market value of
the asset is used to determine the value shown on the balance sheet.
3. J. Downes, J.E. Goodman, "Dictionary of Finance & Investment Terms",
Baron's Financial Guides, 2003
4. J. Downes, J.E. Goodman, "Dictionary of Finance & Investment Terms",
Baron's Financial Guides, 2003; and J. G. Siegel, N. Dauber & J. K. Shim,
"The Vest Pocket CPA", Wiley, 2005.
5. IFRS for SMEs. 1st Floor, 30 Cannon Street, London EC4M 6XH, United
Kingdom: IASB (International Accounting Standards Board). 2009. p. 14.
ISBN 978-0-409-04813-1.
6.The International Accounting Standards Board, IASB
7. IASB.org, IFRS
8.Intermediate Accounting--Kieso, et. al

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