Convertible: 

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.

Tangible: 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).

Asset 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:

1. 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.
2. 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.
3. 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.