“Asset” is one of those words that has both a casual meaning and a specific definition.

As part of
everyday speech, asset is used favorably: “He’s a real asset to the community.” But in the business
accounting sense, what do finance professionals mean by assets? In that context, an asset is something
of value that a company expects will provide future benefit.

Assets are a key component of a company’s net worth. Lenders may also factor in a company’s assets
when issuing loans. As a note, this article only addresses company-owned assets, not Right of Use assets
(i.e. leased assets).

What Is an Asset?

The International Financial Reporting Standards (IFRS) defines an asset as “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.”

Put another way, assets are valuable because they can generate revenue or be converted into cash.
They can be physical items, such as machinery, or intangible, such as intellectual property. Assets are
reported on a company’s balance sheet, one of its key financial statements.

Assets vs. Liabilities

It’s critical to understand the difference between assets and liabilities. A company lists its assets,
liabilities and equity on its balance sheet. Assets are resources a business either owns or controls that
are expected to result in future economic value. Liabilities are what a company owes to others—for
example, outstanding bills to suppliers, wages and benefits due to employees, as well as lease
payments, mortgages, taxes and loans.

As a note, for public companies, leased property and equipment is listed on the balance sheet as both an
asset (Right of Use) and a liability (the present value of future lease payments). Private companies will
soon be required to do the same under U.S. GAAP.

Equity is the company’s net worth—the value that would be returned to the owners or shareholders if
all assets were sold and all debts were settled. The relationship between assets, liabilities and equity is
defined in the “accounting equation,” one of the basic principles of accounting:

Assets = Liabilities + Shareholders’ Equity

A business with more assets than liabilities is considered to have positive equity or shareholder value. If
assets are less than liabilities, a company has negative equity or owes more than it is worth.

How Assets Work

Assets underpin a company’s ability to produce cash and grow. They are categorized based on specific
characteristics, such as how easily they can be converted into cash (for company-owned assets) and
their business purpose. They help accountants assess a company’s solvency and risk, and they assist
lenders in determining whether to loan money to a company.

Types of Assets

Assets can be classified based on a number of criteria. For companies, the correct classification is critical
to financial reporting and evaluating the business’s financial health. Typically, assets are valued by the
expected future cash flows they represent in their current condition, according to the IFRS.

Personal: Soft personal assets, such as intellect, wit or a winning smile are different than personal
financial assets, which contribute to an individual’s or household’s net worth. Examples of personal
financial assets include cash and bank accounts, real estate, personal property such as furniture and
vehicles, and investments such as stocks, mutual funds and retirement plans.

Business: Business assets deliver value to a company because they can be used to produce goods, fund
operations and drive growth. Assets include physical items such as machinery, property, raw materials
and inventory, and intangible items like patents, royalties and other intellectual property. Companies
account for their assets on their balance sheet and categorize them based on a set of criteria that reflect
their liquidity, or how readily they can be converted to cash, as well as whether they are physical or
nonphysical assets and how they’re used to derive value.

Convertibility: Convertibility, or liquidity, refers to how readily a business can convert an asset to cash.
Assets that are likely to be turned into cash within one fiscal year or operating cycle are called current
assets. While any asset can be converted into cash within 12 months if the price is sufficiently
discounted, current assets only include assets that are expected to be converted into cash within 12
months.

Current assets include:

Cash and cash equivalents, such as treasury bills and certificates of deposits.
Marketable securities, such as stocks, bonds and other types of securities.

Accounts receivable (AR), or sales to customers on credit that must be paid in the short term.

Inventory, or the salable goods and materials a company has on hand.

Non-current assets are items that may not be readily converted to cash within a year. Examples of such
assets include facilities and heavy equipment, which are listed on the balance sheet, typically under the
heading property, plant and equipment (PP&E). Not all companies use the term “PP&E” on their balance
sheet—they may instead list non-current assets under the heading fixed assets, long-term assets or
simply non-current assets.

Physical existence: Assets that have a physical existence are called tangible assets. They include cash,
PP&E, inventory, raw materials or tools and office supplies. Tangible and intangible assets that are
expected to provide an economic benefit beyond the current year, such as manufacturing equipment or
buildings, are called or “long-lived” assets.

Intangible assets, as the name implies, lack a physical presence. Examples of intangible assets include
right of use assets, patents, copyrights and trademarks, the value of which can sometimes be difficult to
quantify.

Some tangible and intangible assets are referred to as wasting assets, or assets that decline in value over
a limited life span. Tangible assets that qualify as wasting assets include manufacturing equipment and
vehicles, which wear down or become obsolete over time. Intangible assets such as patents also qualify
as wasting assets because they have a limited lifespan before they expire. To reflect wasting assets’
reduction in value over time, accountants reduce the assets’ value on the balance sheet by applying
depreciation (for tangible assets) or amortization (for intangible assets).

Usage: Finally, an asset can be classified as operating or non-operating based on how a company uses it.
Operating assets are necessary to the primary operations of a business, such as cash, inventory,
factories and patents. For a mining company, heavy equipment qualifies as an operating asset, as does a
manufacturer’s production equipment.

Non-operating assets are not necessary for funding business operations but have other peripheral value.
Examples include short-term investments, marketable securities, interest from deposits and
administrative computers.

Examples of Assets
There are a wide variety of assets that businesses might have to perform at their highest level. They
include:

Cash and cash equivalents

Accounts receivable (AR)

Marketable securities

Trademarks

Patents

Product designs

Distribution rights

Buildings

Land

Mineral rights

Equipment

Inventory

Software

Computers

Furniture and fixtures

Three Key Properties of Assets

For something to be considered an asset, it must have three properties:

Ownership: First, a company must have ownership or control of the asset. This enables the company to
convert the asset into cash or a cash equivalent and limits others’ control over the item. Note, right of
use assets aren’t always convertible. Lease agreements often stipulate that the lease cannot be
transferred or sold. The ownership property is important when considering an asset’s informal meaning
versus its technical meaning. For example, companies often say their employees are their “greatest
asset,” but in terms of accounting, companies don’t have true control over them—employees can easily
leave for a new job.

Economic value: Second, an asset must also provide economic value. All assets can be sold or otherwise
converted to cash, except for some right of use assets such as lease agreements. In that way, assets can
be used to support production and business growth.
Resource: Finally, an asset must be a resource, which means it has or can be used to generate future
economic value. This generally means that the asset can create future positive cash inflows.

Importance of Asset Classification

Properly classifying assets is important for company leaders to have an accurate picture of key financial
metrics such as working capital and cash flow. Asset classification can also help a business qualify for
loans—it gives the bank a clearer picture of the risk it’s taking on—work through bankruptcy and
calculate tax liabilities.

Distinguishing operating assets from non-operating assets also helps organizations see how each asset
type drives overall revenue.

Three Classifications of Assets

Business assets can be divided into three different categories based on their convertibility, physical
existence and usage. What are these three types of assets?

Convertibility describes how easily assets can be converted to cash.

Physical existence describes whether an asset physically exists or is intangible.

Usage describes the purpose of an object as it relates to business operations.

classification of assets

How Do Assets Play into Accounting?

Understanding and properly valuing assets is integral to accurate accounting, business planning and
financial reporting. And in the case of public companies, accurately accounting for leased assets is
required by law. Classifying and valuing assets is critical to understanding a company’s cash flow and
working capital. Accountants have to properly classify assets for purposes such as securing credit and
obtaining insurance. They also have to properly value assets in order to calculate depreciation and
amortization for tax purposes, and to enable the company to sell them if necessary.

Automated Asset Management Solutions

Keeping track of assets can be challenging given the number and diversity of assets a company may own.
Automated asset management solutions offer a way to inventory, categorize and track assets in order to
understand their value and plan operations efficiently. Asset management solutions can also help to
track and plan the operational life cycle of an asset from acquisition to disposal, including operating and
maintaining the asset. In addition, automated asset management solutions can help a company comply
with shifting government or industry regulations.
Assets include almost everything owned and controlled by a company that’s of monetary value and will
provide future benefit. Assets are classified by how quickly they can be converted to cash, whether they
are tangible or intangible, and how a business uses them. Assets are a key component of a company’s
net worth and an important factor in its overall financial health.