In business and accounting, an asset is defined as a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction or event. A business (also called firm or an enterprise) is a legally recognized organizational entity designed to provide goods and/or services to Accountancy or accounting is the measurement statement or provision of assurance about financial information primarily used by Lenders managers,
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Asset characteristics
Assets have three essential characteristics:
The probable future benefit involves 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;
- The entity can control access to the benefit; and,
- The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred. Cash flow (also called net cash flow) is the balance of the amounts of Cash being received and paid by a business during a defined period of time sometimes tied A non-profit organization ( abbreviated "NPO" also "not-for-profit" is a legally constituted Organization whose objective is to support or engage
It is not necessary, in the financial accounting sense of the term, for control of assets to the benefit to be legally enforceable for a resource to be an asset, provided the entity can control its use by other means. Financial accountancy (or financial accounting) is the field of Accountancy concerned with the preparation of Financial statements for decision makers
It is important to understand that in an accounting sense an asset is not the same as ownership. In accounting, ownership is described by the term "equity," (see the related term shareholders' equity). Assets are equal to "equity" plus "liabilities. "
The accounting equation relates assets, liabilities, and owner's equity:
- Assets = Liabilities + Owners' Equity
The accounting equation is the mathematical structure of the balance sheet. The basic accounting equation is the foundation for the Double-entry bookkeeping system. In accounting terms after all liabilities are paid ownership equity is the remaining interest in Assets If valuations placed on assets do not exceed liabilities In Financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances
Assets are usually listed on the balance sheet. In Financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances It has a normal balance, or usual balance, of debit (i. The basic accounting equation is the foundation for the Double-entry bookkeeping system. Debit and credit are formal Bookkeeping and Accounting terms They are the most fundamental concepts in accounting representing the two records that one e. , asset account amounts appear on the left side of a ledger). A ledger or lieger (from the English dialect forms liggen or leggen, to lie or lay in sense adapted from the Dutch substantive
Similarly, in economics an asset is any form in which wealth can be held. Economics is the social science that studies the production distribution, and consumption of goods and services. Wealth derives from the old English word "weal" which means "well-being
Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board [1]. The International Accounting Standards Board (IASB founded on April 1 2001 is the successor of the International Accounting Standards Committee (IASC founded in June 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. " [2]
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.
Classification of assets
Assets may be classified in many ways. In a company's balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country. In Financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances Generally Accepted Accounting Principles (GAAP is the standard framework of guidelines for Financial accounting.
Current assets
Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. In Accounting, a current asset is an Asset on the Balance sheet which is expected to be sold or otherwise used up in the near future usually within one 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:
- Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e. Cash and cash equivalents are the most liquid Assets found within the asset portion of a company's Balance sheet. Market liquidity is a Business, Economics or Investment term that refers to an Asset 's ability to be easily converted through an act of buying A currency is a unit of exchange, facilitating the transfer of Goods and/or services It is one form of Money, where money is A deposit account is a current account at a Banking institution that allows money to be deposited and withdrawn by the account holder with the transactions and resulting balance A negotiable instrument is a specialized type of " Contract " for the payment of money that is unconditional and capable of transfer by negotiation g. , money orders, cheque, bank drafts).
- Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).
- Receivables — usually reported as net of allowance for uncollectible accounts.
- Inventory — trading these assets is a normal business of a company. Inventory is a list for goods and Materials, or those goods and materials themselves held available in stock by a Business. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. In Financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances This is known as the "lower of cost or market" rule.
- Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also adjusting entries. In Accounting / Accountancy, adjusting entries are journal entries usually made at the end of an accounting period to allocate Income and
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. Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business
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 in the near future. This group usually consists of four types of investments:
- Investments in securities, such as bonds, common stock, or long-term notes.
- Investments in fixed assets not used in operations (e. g. , land held for sale).
- Investments in special funds (e. g. , sinking funds or pension funds).
- Investments in subsidiaries or affiliated companies. A subsidiary, in business matters is an entity that is controlled by a bigger and more powerful entity
Different forms of insurance may also be treated as long term investments. Insurance, in Law and Economics, is a form of Risk management primarily used to hedge against the Risk of a contingent loss
Fixed assets
Also referred to as PPE (property, plant, and equipment), or tangible assets, these are purchased for continued and long-term use in earning profit in a business. Fixed asset, also known as property plant and equipment (PP&E is a term used in Accountancy for Assets and Property which cannot easily be This group includes land, buildings, machinery, furniture, tools, and certain wasting resources e. Land in Economics comprises all naturally occurring resources whose supply is inherently fixed (i In Architecture, Construction, Engineering and real estate development the word building may refer to one of the following Any man-made A machine is any device that uses Energy to perform some activity Furniture is the Mass noun for the movable objects which may support the human body (seating furniture and beds, provide storage or hold objects on horizontal A broader definition of a tool is an entity used to interface between two or more domains that facilitates more effective action of one domain upon the other g. , timberland and minerals. A mineral is a naturally occurring substance formed through geological processes that has a characteristic chemical composition a highly ordered atomic structure and specific They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land). Depreciation is a term used in Accounting, Economics and Finance to spread the cost of an Asset over the span of several years Accumulated depreciation is shown in the face of the balance sheet or in the notes.
These are also called capital assets in management accounting. Capital asset has two related meanings in the fields of accounting and financial economics Management accounting is concerned with the provisions and use of Accounting information to managers within organizations to provide them with the basis to make informed business
Intangible assets
Intangible assets lack physical substance and usually are very hard to evaluate. Intangible assets are defined as identifiable non-monetary Assets that cannot be seen touched or physically measured which are created through time and/or effort and that are They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc. A patent is a set of Exclusive rights granted by a State to an inventor or his assignee for a fixed period of time in exchange for a disclosure of an Copyright is a legal concept enacted by Governments, giving the creator of an original work of authorship Exclusive rights to control its distribution usually for Franchising refers to the methods of practicing and using another person's Philosophy of business. A trademark or trade mark, represented by the symbols ™ and ®, or mark is a distinctive sign or indicator used by an individual A trade name, also known as a trading name or a business name, is the name which a Business trades under for commercial purposes although its registered These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill.
Some assets such as websites are treated differently in different countries and may fall under either tangible or intangible assets. A website (alternatively web site or Web site, a back-construction from the Proper noun World Wide Web) is a collection of Web pages
References
See also
- Asset valuation
- Asset management (physical)
- Balance sheet
- Commodity
- Financial markets
- Gold as an investment
- Hidden asset
- Inflation tax
- Liability
- Lists of corporate assets
- Real estate
- Stockholders' deficit
- Share (finance)
- Global assets under management
External links
- Protecting Business Assets: An article from Oklahoma State University
- Asset Allocation
- Roundtable on accounting for intangible assets
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