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Assets form a foundation for effective accounting and financial planning for both individuals and businesses. For organizations, understanding and managing assets plays a critical role in staying profitable and driving long-term growth.
In this blog, we'll provide a comprehensive answer to the question, what are assets? We'll define what assets are, cover the different types of assets using examples, and share how to classify your assets for effective bookkeeping and financial planning.
Main Takeaways from This Article:
- Assets are items of value that individuals or entities can convert into cash at a future date.
- Asset categories include fixed assets (non-current assets), tangible assets, intangible assets, operating assets, and non-operating assets.
- Classify your assets by identifying and categorizing them, determining their value, and revising your classifications as needed.
- RedBeam provides cloud-based fixed asset tracking software you can use to optimize your asset classification and management.
What Is an Asset?
Assets are items of value acquired in the past that individuals, businesses, or other entities can convert into cash at a future date. They include current assets such as cash and cash equivalents, fixed assets such as buildings and equipment, financial assets such as stocks and bonds, and intangible assets such as patents and copyrights.
For businesses, they can be further grouped into assets used for operating activities related to core operations and those used for other, non-operating activities. These categorizations distinguish how quickly assets can be converted into cash (convertibility or liquidity), whether or not they represent physical items, and how they are used.
In accounting, assets appear on balance sheets. They are contrasted with liabilities, representing debt an individual or company owes. Together with equity, assets and liabilities provide a snapshot of current financial health.
For accounting purposes, your asset tracking solution should keep your business assets separate from your personal assets. For instance, your personal vehicle should not be listed as a company asset. Track assets used for business purposes separately from your personal assets to avoid bookkeeping confusion and protect yourself from becoming personally liable for company debt.
Types and Examples of Assets
The world of business assets is vast and varied. Let's explore the most common classifications and see some real-world examples to illustrate their importance.
Current Assets
Current assets, also liquid assets, are those that can be readily converted into cash within a year or the operating cycle of your business, whichever is longer. They are vital for funding day-to-day operations and maintaining financial liquidity.
Examples: Cash on hand, inventory, accounts receivable (money owed by customers), money market funds (treasury bills, notes, etc.)
Fixed (Non-Current) Assets
A fixed asset is a long-term investment that is not easily converted into cash or cash equivalents. It generally has a lifespan exceeding one year and contributes to a company's ability to produce goods and services over a long period of time.
Examples: Office furniture, desks, computers, laptops, buildings, etc.
Tangible Assets
Tangible assets have a physical presence and can be readily seen and touched. They encompass all the physical assets a company owns or controls, are directly involved in its day-to-day operations, and represent a significant portion of its overall value. Examples are all the assets listed under current and fixed assets.
Intangible Assets
While you can't hold them in your hand, intangible assets hold immense value for a business. These non-physical assets contribute to a company's competitive edge and future earning potential and are often the result of intellectual property development and marketing efforts.
Examples: Trademarks, copyrights (excluding software), customer lists
Financial Assets
These represent a company's investments in other entities. They allow the company to generate additional income or gain exposure to future growth opportunities. The management of financial assets is crucial for long-term financial health.
Examples: Stocks, bonds, mutual funds, etc.
Operating Assets
Operating assets encompass all the resources directly involved in a company's tangible and intangible core operations. They're the tools and resources that keep the business running smoothly and directly contribute to a company's ability to deliver its products or services.
Examples: Production equipment, manufacturing facilities, inventory management systems
Non-operating Assets
Non-operating assets consist of resources you own but don't require for running your operations. They represent assets you could convert into cash that you don't necessarily use on a daily basis.
Examples: unused property, spare equipment, stocks, bonds, patents for products you don't currently produce.
How To Classify Your Assets
Asset classification breaks down into a three-step process: categorize, determine value, and revise periodically:
1. Identify and Categorize Assets
Start by identifying what assets you have so you can categorize where they should go on your balance sheet. Accountants classify assets based on three main criteria:
- Convertibility: Current vs. non-current Assets
- Physical form: Tangible vs. intangible Assets
- Usage in operations: Operating vs. non-operating Assets
Convertibility classifies assets based on how quickly you can convert them into cash. For example, cash equivalents are current assets because they can be converted into cash more quickly than non-current assets such as land.
Physical form distinguishes tangible assets such as equipment from non-physical assets such as intellectual property rights.
Usage distinguishes assets you require for daily operations from other assets you could convert into cash but don't need to run your business. For example, if you run a construction company, you may have certain equipment you need for building projects, while you may have other equipment you don't actually use that you could sell. Note that usage can subdivide the other two asset categories. For example, you may have both operating and non-operating assets that fall under current assets. Balance sheets normally list operating assets before non-operating assets.
Pro Tip: Consider using dedicated asset management software to inventory and categorize your assets. This makes it easy for you to track your assets digitally, update your asset lists, filter assets based on category, and export asset data for further analysis.
2. Determine Asset Value Based on Classification
After categorizing your assets, the next step is to assign value based on their classification:
- Current assets can be valued at current market value or cost. Valuing current assets is pretty straightforward.
- Non-current tangible assets also can also be valued at current market value or cost, but this may take some research because the value of tangible assets may change as they age. You may need to consider factors such as original purchase price, depreciation or potential appreciation, and variables affecting the asset's lifespan or "useful life", such as usage intensity, maintenance practices, or technological advancements that may render the asset obsolete.
- Intangible assets are valued based on estimates of potential value. You can use various methods to estimate this depending on the type of asset involved. For example, you might estimate the asset's value based on the market for similar assets, the cost of replacing the asset, the income the asset could be expected to generate, or royalties the asset might be expected to earn.
- Financial assets such as stocks and bonds are valued by estimating present value of projected cash flows adjusted for risk, determined using a technique called discounted cash flow analysis (DCF).
Pro Tip: Regularly review and update your assets' value and useful life, especially for fixed assets that depreciate over time.
3. Review and Reclassify Assets as Needed
Periodically, you may need to reclassify some of your assets. Developments that call for review of asset classification include scenarios such as:
- You turn a non-current asset into a current asset, such as selling a piece of land that was previously classified as property, plant, and equipment (PP&E)
- You change an asset's intended use, such as beginning to operate a piece of equipment that was previously unused in storage
- An asset's value changes due to market conditions, depreciation, or performance changes
- Your asset management compliance requirements change
- You notice a mistake or discrepancy in your previous asset classification
Consider conducting periodic asset classification reviews, with high-value assets reviewed more frequently.
Manage Your Assets with RedBeam
Classifying your current, noncurrent, intangible, financial, operating, and non-operating assets accurately gives you clearer insight into the value of your company. This improves your ability to conduct financial planning, attract investors, and achieve compliance.
RedBeam's cloud-based fixed asset management software makes it easier for you to classify your assets by leveraging automation. By labeling your tangible assets with RFID tags, you can scan your assets into our software with scanners, mobile devices, or RFID emitters.
This provides you with a digital asset database you can access from any location, view at a glance, analyze for insights, and use to manage your assets efficiently. You can instantly see your assets' value, predict inventory and maintenance needs, and make data-driven business decisions.
With a 30-day free trial, you can get a hands-on feel for our software's capabilities and see how it helps you gain visibility into your assets at all times.
