Asset

An organization can use assets to generate revenue or benefit.


What Is an Asset? 

Assets are the resources that an organization can use to generate revenue or benefit. These are sources of value that could be used by the business at a later stage. 

Assets are divided into two major categories: 

Fixed Assets – These are assets that are used for a long time in the business i.e. for more than one financial year. 
Current Assets – Assets like cash, inventory and accounts receivable are expected to be used or converted into cash within one year and are considered current assets. 

Asset Accounting and Its Importance

Since assets have a long-term value, they are recorded in the balance sheet at their cost minus any accumulated depreciation. The cost of the assets may be anything from cash spent to the cost of goods exchanged to obtain the assets. 

Assets, such as real estate or factory machinery, are often bought on credit and are more complex to buy and sell. Therefore, the accounting for assets is regulated by a set of rules known as Generally Accepted Accounting Principles (GAAP). GAAP ensures that the financial statements reflect the true financial position of the organization. This includes accurate accounting for the acquisition, use and disposal of assets. Therefore, it helps to ensure that the financial statements follow a common standard to be easily comparable and useful for analysis.

Key Properties of an Asset

A thing needs to possess three characteristics in order to be regarded as an asset:

First, the asset must be owned or under the control of the organization. This restricts access to the asset and gives the organization the option to convert it into cash or a cash equivalent. Not all assets with a right of use are convertible. It’s common for lease agreements to prohibit the lease from being sold or transferred. Companies frequently claim that their employees are their “biggest asset,” however, from an accounting standpoint, they have little real control over them as they can quickly leave for another position.

Economic value is the second characteristic of an asset. All assets, with the exception of a few right-of-use assets like lease agreements, can be sold or, otherwise, converted into cash. 

Finally, an asset must be a resource, which means it can be used to create potential economic value now or in the future. In most cases, this denotes the asset’s potential to provide future positive cash inflows.

Assets vs Liabilities

Assets are resources controlled by an organization that generates revenue or reduces expenses. On the other hand, liabilities are future financial obligations that an organization must repay. Both of these are recorded on the balance sheet. 

While the distinction between assets and liabilities is clear, the lines between assets and equity are blurred. Equity refers to the owners’ stake in the business. It is the difference between assets and liabilities. Since equity does not generate revenue for the business, it is not an asset.

What Is Liquidity in Assets?

According to their liquidity, or how quickly they may be converted into cash, assets are sometimes grouped. Cash is the most liquid asset on your balance sheet since it can be utilized right away to settle a debt. A factory, on the other hand, is an illiquid asset because it will likely take some time to sell it and turn it into cash.

Current assets are those that are most liquid. These assets, which include cash, marketable securities, inventories and accounts receivable, can all be turned into cash in less than a year. These resources bring in money for your business.

The category of fixed assets includes all non-liquid assets. These include buildings, automobiles and equipment. 

Fixed assets are tangible goods that often need a sizable capital investment and last for a considerable amount of time.