Learn about how assets work, how they can be categorized into different types, and why keeping track of them is important for both individuals and organizations.
What Are Assets?
Assets can be anything of value owned by individuals or organizations, and they can be categorized in different ways. Personal assets usually include cash and cash equivalents; real estate and land; personal property such as cars, boats, and jewelry; and investments. For organizations, assets usually help sustain production and growth, and they’re usually categorized and expressed in terms of their cash value on financial statements.
How Assets Work
Keeping track of assets is an essential part of running a business, but it’s important for both individuals and organizations to take an inventory of them. If you want to protect yourself or your business, you need to know what assets you have and how much they’re worth in order to get them insured. In addition, lenders may take many of your assets into consideration when deciding to approve a loan, and they may even be used as collateral. Determining the value of assets beyond cash and cash equivalents usually needs to be done by a professional appraiser. There are two common ways of determining the value of assets: the cost method and the market value method. The cost method is a simple way of valuing an asset because it uses its original purchase price. However, the market value, or mark to market method, can be a more accurate way of determining assets’ value because it can decrease or increase from the original purchase price over time. This method bases the value on the price an asset would sell for in the open market.
Types of Assets
When it comes to businesses, assets are usually classified by convertibility (current or fixed assets), physical existence (tangible or intangible assets), and usage (operating or non-operating assets).
Convertibility: Current and Fixed Assets
Convertibility refers to how easy the assets can be turned into cash. Current assets are items that are currently cash or expected to be turned into cash within one year. For a business, they may include cash, inventory, and accounts receivable. Fixed assets are those tangible physical assets acquired to carry on the business of a company with a life exceeding one year. Examples may include land, buildings, vehicles, boats, aircraft, tools, machinery, computer hardware, mobile phones, and other equipment.
Physical Existence: Tangible and Intangible Assets
When looking at the physical existence of assets, they’re usually categorized as tangible and intangible. Tangible assets exist in physical form. They usually include cash, investments, land, buildings, inventory, cars, trucks, boats, or other valuables. Intangible assets don’t exist in physical form. They may include items such as brand names, distribution networks, patents, proprietary processes and methodologies, and copyrights. Current and fixed assets usually fall into the category of tangible assets. Intangible assets do not appear on balance sheets but, depending on the business, they may make up a substantial part of the asset value of a business.
Operating and Non-Operating Assets
When assets are classified by their usage, they’re usually categorized as operating and non-operating. Operating assets are those that are required in the daily operation of a business, such as cash, stock, buildings, machinery, equipment, copyrights, and patents. Non-operating assets may generate revenue but aren’t required for a business to run. They include short-term investments, vacant property and land, and interest income.
