in this video you'll discover what

assets mean in accounting I'm going to

break down the definition for you and

take you through some common types of

asset that are worth knowing about hey

guys welcome to accounting stuff I'm

James and in this video we're going to

be support what assets mean in

accounting before we dive into the good

stuff I just want to make you aware this

video is part of a series that I've

created on accounting basics if you miss

any of the others I'll pop a link to

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is out right assets what are assets

assets of one of the three pillars of

the accounting equation alongside

liabilities and equity they're hugely

important because there were businesses

used to operate and generate a profit in

this video I'll break down the

accounting definition of assets for you

and take you through some of the common

types that exist in most businesses we

accountants we like to split assets

apart into different categories like

current non current tangible or

intangible don't forget to watch this

video through until the end because

you'll discover what all of these terms

mean let's go I think most of us have

kind of a preconceived idea of what an

asset is we think of an asset as

something that we own that's useful or

has value something along those lines

and that's not far from the truth

although the definition of assets in

accounting is a bit more specific assets

a probable future economic benefits

obtained or controlled by a particular

entity as a result of past transactions

or events say what I know what on earth

does that mean let's break the

definition down and try to make some

sense of it the first word that stands

out to me is probable assets our

probable future economic benefits the

word probable carries with it a degree

of uncertainty and I want to emphasize

this because I think that often we take

numbers for granted without questioning

them the reality is that the future is

uncertain and a lot of the time we

accountants have to make estimates let

me give you an example if you're running

your business

and you've got ten clients who although

you money can you say hand on heart that

you'll receive back every penny it's not

uncommon for customers to go bankrupt or

to dispute invoices after the work is

done

so what accountants do in these

situations is making allowance for

doubtful deaths we estimate what might

not be recovered and expensive to

provide for situations where there's

uncertainty and that brings me on to the

next part of the definition assets are

probable future economic benefits what

are future economic benefits these are

the things that bring value to you or

your business either directly or

indirectly valuing assets based on

future economic benefit means that we

can't simply hold them in the books the

value that they originally cost us

imagine you buy a laptop today and you

plan on keeping it and using it entirely

for work well that same laptop carry the

same future economic benefits in five

years time probably not it might well

have tacked it by then and not be worth

anything anymore it can be hard to

measure the lifespan of a laptop so

instead we assume that all that tops

have a useful economic life of say five

years useful economic life is a term

that you'll hear often when talking

about assets it's how long an asset will

remain useful to you and it's different

to an assets actual life because useful

economic life is an estimate so if that

laptop cost you $1000 today and we

assumed a useful economic life of five

years then we would depreciate or reduce

its value by $200 a year for the next

five years until it's worth nothing at

all is this an exact science

no clearly not but estimates like this

are used every day to simplify scenarios

and help accountants value assets lastly

I want to bring your attention to

another part of the definition assets a

probable future economic benefits

obtained or controlled by a particular

entity as the result of past

transactions or events obtained or

controlled this highlights another

important concept that we use an

accounting called substance over form

this means that when preparing financial

statements we prioritize the economic

substance of transactions over their

legal form an example of this is when a

business rents a building for long

period of time say sixty years and that

buildings remaining useful economic life

is sixty-five years although the

business is considered lessee and

technically doesn't own the building the

economic reality of the situation is

that basically they do make sense

because they have the right to use it

for the majority of its remaining useful

economic life following this principle

of substance over form we can account

this building as an asset

even though legally it isn't that has

big implications for the accounting and

tax treatment of the building now I'm

oversimplifying the situation there are

a few other factors to consider when

making this call but that's the gist of

it okay so now we know what an asset is

let's run through some examples of

common assets that you should know about

but first and bear with me here a

balance sheet is a snapshot of a

business's assets liabilities and equity

a single point in time in the asset

section of a balance sheet we list out

all of the different types of assets

that our business owns or controls these

assets are often arranged in order of

liquidity but what is liquidity you can

think of it as how quickly you can turn

an asset into cash and following that

vein of thought assets in the balance

sheet can be divided into two distinct

categories current assets and non

current assets current assets are the

ones that we can convert into cash in a

short period of time typically within a

year the three types of current assets

show up most often a cash account

receivable and inventory inventory is

your physical stock or the goods that

you intend to sell to make a profit when

your business sells inventory your

customers owe you money which we call

accounts receivable and when your

customers actually pay you your accounts

receivable turn into cash the most

liquid asset of them or other current

assets include pre payments and

short-term investments you can think of

pre payments as situations when you're

paying something in advance rent is a

good example because most of us pay rent

at the start of the month at the moment

that rental payment is made

we need to recognize a prepayment as an

asset in a balance sheet it's an asset

even though we aren't going to convert

it into cash because we're going to get

some of that sweet sweet future economic

benefit out of it

the definition not all assets convert

into cash short-term investments can be

made when your business has cash to

spare you might choose to put some of

that money to work by investing it in

stocks and shares this investment is

considered to be a short-term investment

or current asset if you're in it for the

short game and you plan to sell those

stocks or shares within a year's time

however if you want to hold on to them

for longer than a year they become non

current assets instead non current

assets are long-term assets that are

used in operations to generate profits

and it can't easily be converted into

cash there are three main categories of

non-current asset the first which we

touched on a moment ago a long-term

investments these are the investments

that we plan to hold onto for longer

than a year the other two categories

from non current assets are tangible or

intangible assets tangible or fixed

assets the ones that have an actual

physical presence you can actually touch

them the most common types are land in

buildings or PPE which stands for

property plant and equipment these

include things like furniture machinery

in cars the not all assets have a

physical presence we call those that

don't intangible assets intangible

assets include things like intellectual

property patterns royalty rights

trademarks and copyright if you're a

photographer then you might earn the

royalty rights to some of your own

photos if a company wants to use one of

your images for their website or blog

they should pay you a royalty fee to

recognize your work so this intellectual

property that you own is bringing you

probable future economic benefit it

should be an asset right the answer is

sometimes

the thing with intangible assets so they

can be very difficult to value how can

you calculate the future economic value

of your own licensed photos you can't

really so most of the time businesses

don't capitalize intangible assets that

they've generated internally

what does capitalize me when we

capitalize something we record it as an

asset in the balance sheet as opposed to

expensing it in the income statement we

only capitalize intangible assets that

we purchase from someone else

and these are held at the cost value

that we paid for those assets or a lower

amount because we amortize intangible

assets to decrease their value over time

much like we depreciate fixed assets an

intangible asset it does

fit into the category of intellectual

property is goodwill goodwill is the

amount that one company is prepared to

pay for another over and above the fair

value of his net assets when Facebook

bought Instagram back in 2012 for

something stupid like a billion dollars

where instagrams net assets at the time

worth that much not by a long shot the

majority of that purchase was the

goodwill that's the premium that

Facebook were happy to pay for

instagrams brand and potential future

earnings over and above the fair value

of their net assets thanks for watching

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the comments and maybe maybe if you're

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well maybe you just want to chat it's

all good far away as always there are

new videos every week here in accounting

stuff see you next time it's not

character yet although I did drop it

whilst trying to put in the bin sorry

laptop didn't mean to hurt you

you

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