Assets have multiple classifications that follow various accounting rules and regulations, and learning about them can help you improve your financial skills. Assets directly give a financial advantage or prove ownership of a financial benefit.
They are the property of an individual or a business that claims them for financial gain. Assets can be long-term or short-term investments. Financial assets retain their worth over time and can be readily converted into cash.
The 3 characteristics of assets:
- Economic value: This is the value of an asset when it is sold or exchanged
- Ownership: An individual owns personal assets. The business owns company assets. The asset’s owner decides when to convert it to cash.
- Resource: The resources used by the asset, such as cash, fixed assets, and equipment, determine its function and how it helps growth.
Classifications of Assets
There are six main types of assets, which you can categorize based on several classifications.
Classification # 1. Convertibility
Current Assets: The owner can convert current assets into cash or cash equivalents within a year through sales or account payments. Companies can utilize current assets to cover day-to-day expenditures and other short-term liabilities.
- Cash: Cash assets include cash on hand and the total amount of money in your bank accounts, certificates of deposit, and prepaid expenses.
- Mutual funds: This account comprises funds from numerous investors and is part of a portfolio of mixed assets.
- Marketable securities: These may include treasury bills, stocks, and equities you can liquidate.
- Goods and Products: Items a business owns or the current inventory of unsold products.
- Supplies: Supplies can include office equipment like paper products and manufacturing supplies like wood, textiles, and plastic.
- Accounts receivable: Accounts receivable are payments clients owe you for products you sold or services you rendered. These are short-term assets because you can collect the money within a year.
Fixed (or Non-Current) Assets: Fixed assets are long-term physical assets kept for lengthy periods and frequently depreciated. These assets cannot be converted to cash rapidly or utilized to satisfy everyday needs.
Fixed assets usually are only sold in an emergency and when they are more profitable than current assets.
- Buildings and Land – Any property or land purchased and owned by a business, including any permanent structures on the land.
- IT Equipment – A company’s computers, servers, routers, and other associated equipment.
- Machinery – Machines aid in the production of goods that generate income.
- Vehicle – A company’s vehicles, including work trucks and automobiles
Classification #2. Physical Existence
Tangible Assets: Tangible assets can be touched, felt, or seen. They are any actual or quantifiable items a corporation employs in its operations. These assets provide ways for the business to operate.
- Buildings
- Cash
- Equipment
- Inventory
- Land
- Machinery
- Supplies
Intangible assets: Intangible assets are nonphysical assets that add value to a business. These assets might be more challenging to quantify or assign a monetary value to, but they can also be more valuable than the tangible assets owned by the business.
- Copyrights
- Goodwill
- Intellectual Property
- Patents
Classification #3. Usage
Operating Assets: Operating assets enable businesses to carry out their more fundamental business operations, which helps them earn money. These assets are critical to a company’s day-to-day operations.
- Buildings
- Cash
- Copyrights
- Machinery
Non-Operating Assets: Non-operating assets are those businesses may utilize to produce money, although they are unnecessary for day-to-day operations.
- Interest Income from Fixed Deposits
- Marketable Securities
- Short-term Investments
- Vacant Land
Knowledge is Power: Knowledge of Accounting Fundamentals may assist you in finding harmony with your accounting staff. Ideally, you’ll engage a team of accounting professionals to assist you with daily tracking of your assets, cash flow, banking, and tax preparation.
However, these specialists will still require your advice and assistance. Accounting knowledge will help you communicate more effectively, openly exchange ideas, express your point of view, and intelligently examine the advice they present.
Learn More About Accounting from Your Local Experts
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Target Accounting team gets results by focusing on strong and lasting relationships with our clients – by understanding their business and financial goals to help them reach their full potential.