Rebekiah has taught college accounting and has a master's in both management and business.
What Are Assets?
What exactly are assets? In the accounting world, assets are items that have monetary value and are owned by a business. Assets are either tangible or intangible. Tangible assets are those assets that have a physical form. They can be seen and touched. A building is a tangible asset.
Intangible assets are just the opposite and are a concept rather than a concrete object. Intangible assets have no physical form. Examples of intangible assets are such things as the right to a domain name or a trade name. Even the knowledge and skills of employees can be considered intangible assets.
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Though there are just two types of assets, there are several different categories of assets. Some of the most common categories of assets are:
Cash - The asset cash consists of paper money, coins, checks, and money orders that are made payable to the business.
Accounts receivable - This type of asset is one that involves the selling of a good or service on credit to a customer. Even though there is no immediate transfer of cash from seller to customer, there is a monetary amount due in the future.
Inventory - Included in this asset category are such things as raw material that is used in production and finished goods not yet sold.
Supplies - Pens, paper, stamps, printer toner, boxes, labels, and tape are a few prime examples of this type of asset. Supplies are usually used up within a year.
Prepaid expenses - These are the expenses that are paid in advance and expensed out over the course of one year or less. For example, XYZ Company pays property insurance on an annual basis in January of each year. The total amount paid is $3,600. The amount that is charged to insurance expense, a liability account, is $300 (3,600 / 12 = 300) each month. The asset account (prepaid insurance) balance will decrease throughout the year until it reaches $0.
Plant, property, and equipment - This classification of assets includes such things as buildings, land owned by an organization, and machinery used for the daily operations of the organization.
How Are Assets Reported?
Assets are reported on the balance sheet and are grouped into two classifications - current assets and noncurrent assets.
The grouping of assets on the balance sheet is based on one major characteristic - the order of liquidity of the asset. Liquidity refers to how easily an asset can be converted to cash. Current assets are the most liquid. These are the assets that are expected to be sold, converted to cash, or used up within one year of the balance sheet date. Cash is the most liquid of all assets; therefore, it holds the number-one spot in the current asset listing. It is followed by accounts receivables, inventories, supplies, and prepaid expenses.
Noncurrent assets are very simply the assets that are not considered current assets. These types of assets are very important to the operation of the company but are not readily converted to cash. They usually are acquired at large costs to the organization. Noncurrent assets are grouped under the categories of plant, property, and equipment and intangible items.
Let's review. Assets add value to an organization and serve as the lifeline through which finances flow. For the purpose of financial reporting, generally accepted accounting principles require that assets be recorded on the balance sheet and classified as current or noncurrent in nature. Current assets are used to fund day-to-day activities of the company, while noncurrent assets are used as collateral to secure financing when needed.
Having assets categorized, classified, and reported on the balance sheet allows potential funders to get a good picture of the financial health of the company, which is imperative for decisions about funding to be made. Without assets, a company simply could not grow.
- Assets: in the accounting world, items that have monetary value and are owned by a business
- Tangible asset: asset that has a physical form, such as a building
- Intangible asset: asset that does not have a physical form, such as the right to a domain name
- Liquidity: how easily an asset can be converted to cash
Once you are clear on the meaning of assets, test your ability to:
- Distinguish between a tangible asset and an intangible asset
- Recall different asset categories and provide examples
- Report assets on a balance sheet
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What Are Assets? - Definition & Examples
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