Assets are a fundamental part of a business’s finances. You may typically think of these as things you own — like your car, your house or your computer — and those are, indeed, personal assets, but assets in accounting are something entirely different.
In the double-entry accounting method — the method most businesses use — you’re going to run into a lot of different types of asset accounts. These are by virtue the opposite of liabilities (i.e., the things you owe or pay out), but they’re not always completely tangible. So, what actually are assets in accounting, and where do you find them?
TL;DR (Too Long; Didn't Read)
Assets in accounting are things held by your company that provide current or future economic benefits.
What Is an Asset?
Flatly put, an asset is anything with economic value that you own or control that will in some way provide a benefit. Usually, that benefit is an increase in value, like generating cash flow, but it can also be something that improves sales, like a patent or equipment that streamlines the manufacturing process. In order for a company to have an asset, it must be in the company’s possession at the time financial statements are dated.
In accounting, assets are shown on a company’s balance sheet and are weighed against liabilities. Typically, you’ll see assets in the accounting equation Total Assets = Liabilities + Owner’s Equity (or Shareholder’s Equity), but assets are not always measurable. Some assets may include a brand’s outstanding reputation, consumer loyalty and top-performing staff. These types of assets are not reported on a balance sheet.
In accounting, there are four types of assets:
- Short-term assets (also known as current assets)
- Fixed assets (or long-term assets)
- Financial assets
- Intangible assets
The value of the assets on a balance sheet should be based on historical cost. This concept represents the asset’s original cost (i.e., the purchase price) and is then adjusted for aging. For example, a brand-new car loses value the second you drive it off the lot.
Short-term assets, or current assets, are resources that are expected to become cash within a year. It does not include things that may be hard to liquidate, like niche machinery, property or a plant. Instead, it includes things like:
- Accounts receivable: This type of account represents money due to your company for services you’ve completed or goods you’ve sold, but it hasn’t yet been paid by customers. It’s typical for companies to have net 30, net 45 and net 90 payment terms. As long as the line of credit is no longer than a year, it counts as a short-term asset.
- Inventory: These are things like raw materials and finished products, but depending on the industry and salability of the product, inventory is not always lumped in with short-term investments because it takes a long time to sell.
- Prepaid expenses: Yes, prepaying reduces future debts so capital can be used elsewhere.
- Marketable securities: There are liquid equity or debt securities.
- Cash and cash equivalents: These are things like certificates of deposit and treasury bills.
These types of assets are so important because it’s effectively the money that could fund business operations once it’s swiftly converted into liquid assets (though some of it, like the cash in a bank account, may already be a liquid asset).
Unfortunately, not all short-term assets are a sure-fire thing. For example, take your accounts receivable. There’s a fair chance that some client or consumer isn’t going to pay the invoice. To strike that out on your balance sheet, you’ll need to include a contra asset account known as a bad debt reserve.
Fixed assets, or capital assets, are long-term investments or noncurrent assets that are tangible and have a shelf life of longer than a year. They cannot be easily converted into cash to cover day-to-day business operations in a pinch. These are listed on a balance sheet as property, plants and equipment. Fixed assets include:
- Office furniture
- Office supplies
- Real estate
In accounting, when a fixed asset is acquired, it should be recorded on a cash-flow statement under the cash flow from investing activities. Remember that fixed assets are physical assets that should provide a future benefit, whether it’s expanding operations or streamlining processes. In the case of office supplies, that benefit isn’t exactly tangible, but it’s there.
Financial assets are indeed a liquid asset, but their exact value isn’t tied to their physical worth. It’s really just a matter of supply and demand, and some financial assets are merely promises between investors and business owners. For example, a personal financial asset could be considered a few bitcoin because they’re only worth as much as the current market dictates.
Most commonly in business and accounting, financial assets are things like cash, stock, preferred equity, sovereign and corporate bonds, mutual funds, bank deposits and hybrid securities. Per the International Financial Reporting Standards, financial assets include:
- Equity of another entity (proven via something like a share certificate)
- A contractual right to receive cash or financial assets from another company or a favorable exchange of financial assets and liabilities with another entity (for example, a certificate of deposit)
- A contractual right to exchange financial assets with another business as long as it’s in your favor (like a bond)
- A contract for the entity's own equity instruments
The good part about financial assets is that the Federal Deposit Insurance Corporation and National Credit Union Administration protect liquid assets like CDs and bank accounts up to $250,000, so even if a bank goes bust, your money is protected.
Intangible assets are impossible to label with a market value. These are the things that can’t be sold but provide economic value, and no, this doesn’t include things like stocks and bonds, which technically are intangible (contracts are considered tangible assets). This is strictly noncontract stuff, like intellectual property and brand recognition. Examples of intangible assets include:
- Brand names (and brand recognition)
- Copyrights and other intellectual property
- Consumer loyalty
Technically, intangible assets can be indefinite. They can be crafted out of nothing unlike physical assets, which are basically moved from company to company, though you can certainly buy intangible assets. It’s just hard to set a price. We see this all the time in acquisitions when companies buy brand names, shutter operations of their staff and absorb the intellectual property into their own product.
Examples of Intangible Assets
Intangible assets may be a little harder to understand, but they are extremely likely to make or break a company. For example, Apple purchased transit direction app HopStop in 2013. It shuttered the app, took the intellectual property within the app (the transit mapping services) and integrated it into their own product, Apple Maps. This intellectual property was an intangible asset that HopStop owned, but it basically made Apple Maps a staple for city dwellers.
We saw this again in the music industry with Juice WRLD. The late rapper was sued by Sting for using a sample of “Shape of My Heart” in his hit “Lucid Dreams.” Sting ended up winning a reported 85% of the song's royalties. The copyright of “Shape of My Heart” was an intangible asset to Sting’s business that did in fact eventually have quantifiable monetary returns.
How Do Assets Impact Accounting?
Generally, companies use accounting software to help them keep track of assets. In bookkeeping, assets accounts should be clearly outlined in a general ledger and balance the amount of liabilities. At the end of the day, an increase in assets means an increase in equity, and an increase in liabilities means a decrease in equity.
- Investopedia: Current Assets Definition
- Investopedia: Fixed Asset
- WallStreetMojo: Financial Assets
- Investopedia: Financial Assets
- Okay Player: Sting Owns 85 Percent of Juice WRLD's "Lucid Dreams"... But He's Not Mad About it
- New York Business Journal: 2 Years After Apple Bought It, HopStop to Make Last Trip
- Investopedia: Intangible Asset
- Accounting Coach: What Are Fixed Assets?
- Investopedia: Asset