Saturday, 13 September 2014

Assets : Definition and types of assets

What is an Asset?
Any goods of important value and are of durable nature and which are saleable in the market may be treated as Asset.

But sometimes, in an ordinary lay man's perspective, anything considered as very important for him can be treated as an asset to him. So he may regard his child as his asset. Or some gift received from his sweetheart can be a great asset for him. Or even his hands or limbs or brain can be treated as an asset by him which are of much importance for his earning and sustenance.

But, generally, for an accounting purpose, an asset is considered as some goods having significant importance with some monetary value and can last for a durable period and can be easily sold in a market or can be exchanged for other goods.

Definition of Asset

Different definitions are there for describing an asset. But the essence of all definitions is more or less the same.

"So an asset may be any goods or resource or property having value for some durable period and which generates income or aids in the production of other goods and services which generate income to the holder of that asset."

So from above definition, you are able to see that-
  • An asset has to be of some value. 
  • It should be marketable or exchangeable for other items in the market. 
  • It should be of some considerable duration. 
  • And finally, it can be anything that generates income for a certain duration of the period.

Types of Assets
From the above definition, you are able to see that assets have different qualities. So, assets have been classified according to their nature and tangibility.

1) Liquidity or Convertibility:

One classification of assets is into Current Assets and Fixed Assets based on their conversion capacity into easy money.
  • Current Assets are more easily convertible into cash or other goods within a short span of time with no legal barriers and procedures. Goods in stock or trade, cash and bank balances and other sundry advances or deposits fall in this category of Current Assets. Current assets mostly are of shorter time span and may become obsolete after a certain period.
  • Fixed Assets are more of a fixed nature and last for many years like Land, Road, Building, Plant, and Machinery, etc. Further, they can not be easily sold or converted. They require adequate legal formalities and considerable time to dispose of. 
2) Usage or Utility:
Another classification based on the utility or usage of assets divides the assets into Operating and Nonoperating.
  • Operating Assets are those which are required for daily operations of the business as well as for use in the different production procedures so that the business can generate income. So naturally, the working capital like Cash and Bank balance, inventory in use, a stock of semi-finished and finished goods, Building, and Plant and machinery used for running the business all these items are termed as Operating assets.
  • Non-Operating Assets are assets of not any importance for running the business but still held for future plans or disposal. The business production and activities do not get hindered by disposing of those assets. Such assets can include any excess land or buildings kept for future plans and extra cash or funds invested unnecessarily. Some inventory of old and obsolete items no longer used for production and inoperative dead balances lying since long can also be treated as non-operating assets.
3) Tangibility or Physical Nature:
According to the physical or non-physical existence of assets, they are classified into Physical assets and Non-physical assets.
  • Physical or Tangible Assets are those which have physical quality and can be seen and felt. All fixed assets, cash, and bank balances, inventory items, debtors all these are tangible assets.
  • Intangible Assets can be anything that can not be touched or felt like company's Brand name, patent, copyrights, logo, goodwill, and trademark, etc. Even though not physical, these are very useful and important as they promote business and help in increasing sales and profits.

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