An asset is an item which can be converted into cash or can be used as a substitute of cash by the owner of the underlying asset, which can be an individual, firm or a company. Asset has an economic value and is bought by the company so as to increase its value as well as help in generating future cash flows of the company. Asset is what the company or firm owns.
Assets are recorded on the balance sheet of the company and are categorised on the basis of period of holding of the asset:
Assets held for a period of more than one year are usually recognised as Fixed Assets and are used in the long term for generation of income and is not expected to be converted into cash in a period of one year. These are recorded at the cost at which they were acquired and are usually depreciated for impairment or obsolescence. Examples of Fixed Assets include buildings, plant and machinery, vehicles, furniture, etc.
Assets held for a period of less than one year or are expected to be converted into cash within a period of one year are known as Current Assets. They are also known as liquid assets as these are comparatively easier to be converted into cash. They have an important role in a company’s day to day operations and are very useful to the management in determining liquidity ratios. Examples of Current Assets are cash, inventory, accounts receivable, short term investments, etc.
Assets can also be distinguished between tangible and intangible assets:
- Tangible assets are physical assets (which can be touched) used and replaced throughout the period of the company which help in production goods or providing services for the business. Tangible assets include both Fixed and Current Assets. Some examples of Tangible Assets are Plant & Machinery, Inventory, Buildings, etc.
- Intangible assets are non-physical assets (which cannot be touched) clearly identifiable by the company and help to increase the future profits of the company. They are amortized over the period of use and help to enhance the value of tangible assets directly or indirectly. These can also be assessed for any impairment in its value every year. Some examples of intangible assets are goodwill, patents, trademarks, brand recognition (like Colgate wouldn’t be as successful if not for the brand recognition created by the company). Intangible assets are generally fixed in nature.