Loading the player...

What is an 'Asset'

An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. Assets are reported on a company's balance sheet, and they are bought or created to increase the value of a firm or benefit the firm's operations. An asset can be thought of as something that in the future can generate cash flow, reduce expenses, improve sales, regardless of whether it's a company's manufacturing equipment or a patent on a particular technology.

BREAKING DOWN 'Asset'

An asset represents a present economic resource of a company to which it has a right or other type of access that other individuals or firms do not have. A right or other access is legally enforceable, which means that a company can use economic resource at its discretion, and its use can be precluded or limited by an owner. For an asset to be present, a company must possess a right to it as of the date of the financial statements. An economic resource is something that is scarce and has the ability to produce economic benefit by generating cash inflows or decreasing cash outflows.

Assets can be broadly categorized into short-term (or current) assets, fixed assets, financial investments and intangible assets. Assets are recorded on companies' balance sheets based on the concept of historical cost, which represents the original cost of the asset, adjusted for any improvements or aging. Historical cost is also called the book value.

Current Assets

Current assets are short-term economic resources that are expected to be converted into cash within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses. While cash is easy to value, accountants periodically reassess the recoverability of inventory and accounts receivable. If there is persuasive evidence that collectability of accounts receivable is impaired or that inventory becomes obsolete, companies may write off these assets.

Fixed Assets

Fixed assets are long-term resources, such as plants, equipment and buildings. An adjustment for aging of fixed assets is made based on periodic charges called depreciation, which may or may not reflect the loss of earning power of a fixed asset. Generally accepted accounting principles (GAAP) allow depreciation under two broad methods: the straight-line method assumes that a fixed asset loses its value in proportion to its useful life, while the accelerated method assumes that the asset loses its value faster in its first years of use.

Financial Assets

Financial assets represent investments in the assets and securities of other institutions. Financial assets include stocks, sovereign and corporate bonds, preferred equity, and other hybrid securities. Financial assets are valued depending on how the investment is categorized and the motive behind it.

Intangible Assets

Intangible assets are economic resources that have no physical presence. They include patents, trademarks, copyrights and goodwill. Accounting for intangible assets differs depending on the type of asset, and they can be either amortized or tested for impairment each year.

RELATED TERMS
  1. Tangible Asset

    A tangible asset is an asset that has a physical form, and includes ...
  2. Asset Valuation

    A method of assessing the worth of a company, real property, ...
  3. Replacement Cost

    The cost to replace the assets of a company or a property of ...
  4. Impaired Asset

    A company's asset that is worth less on the market than the value ...
  5. Capitalize

    An accounting method used to delay the recognition of expenses ...
  6. Carrying Value

    An accounting measure of value, where the value of an asset or ...
Related Articles
  1. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  2. Managing Wealth

    Comparing Tangible and Intangible Assets

    Tangible assets are physical assets such as land, vehicles or equipment.
  3. Investing

    Goodwill vs Other Intangible Assets: What's the Difference?

    "Intangible" assets don't possess physical substance. Yet they are quanitfiable, and of great importance to any business.
  4. Investing

    How Is Impairment Loss Calculated?

    Impairment loss is the decrease in an asset’s net carrying value that exceeds the future undisclosed cash flow it should generate.
  5. Investing

    Explaining Amortization In The Balance Sheet

    Read to find out more about amortization, an important way to account for the value of intangible assets.
  6. Investing

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  7. Investing

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  8. Managing Wealth

    6 Asset Allocation Strategies That Work

    Your portfolio’s asset mix is a key factor in its profitability. Find out how to achieve this delicate balance.
RELATED FAQS
  1. How do you account for changes in the market value of various fixed assets?

    Understand how to account for changes in the fair market value of a company's fixed assets. Learn what accounting methods ... Read Answer >>
  2. What is the difference between carrying value and market value?

    Understand the difference between carrying value and market value. Learn when a company uses carrying value to value an asset ... Read Answer >>
  3. What are the differences between amortization and impairment?

    Learn the differences between amortization and impairment as they relate to intangible assets held on a company's balance ... Read Answer >>
  4. Are stocks real assets?

    Learn why stocks are classified as financial assets, not real assets. Understand the properties that determine whether an ... Read Answer >>
  5. What are some examples of fixed assets?

    Learn the difference between fixed tangible assets and fixed intangible assets, and review examples of these two types of ... Read Answer >>
  6. What are some ways a business owner can reduce unlimited liability?

    Understand how a fixed asset becomes impaired. Learn the accounting practices of impairing a fixed asset, and how it's recognized ... Read Answer >>
Hot Definitions
  1. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  3. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  5. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  6. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
Trading Center