What are Assets?

What are Assets?

Assets are the economic resources that are owned by a business entity and help to generate income of the business. The asset can be tangible or intangible in nature and are expressed in monetary terms. For example Property, Plant & Machinery, Building Inventory, Cash in hand, Cash at the bank, Trade receivable, etc.

Explanation with Example

Assets are the resources that a business owns. These assets are used for the furtherance of business. For example, plant & machinery used for the manufacture of goods that the business will sale is the asset of the company as without such plant & machinery the business cannot manufacture goods and if products are not manufactured then there will be no revenue of the business and this will ultimately lead to the closure of the business.

For example Mr Y sold goods worth $50 on credit to Mr J and goods worth $40 to Mr K for cash. Therfore, Assets generated in this case are:

1. Mr J (accounted as Debtor) amounting to $50 generated from credit purchases.

2. Cash amounting to $40 generated from cash sales to Mr. K.

Total assets = $50 + $40 = $90

Features of Asset

  1. Assets are the valuable resources that a business owns.
  2. They are expressed in terms of money in the books of accounts of the business.
  3. They can be tangible assets i.e. assets that can be seen or touched and have physical existence such as Plant & Equipment, Furniture, etc. or intangible assets i.e. assets that cannot be seen or touched and do not have any physical existence such as Goodwill, Patent, Trademark, etc.(Above bifurcation is for Non- Current assets).
  4. Assets are owned by business enterprises to generate economic benefits for the business in current and future years.

Types of Asset

The assets are further bifurcated into Current Assets & Non-Current Assets.  Let’s discuss the kind of assets in detail.

Current Assets:

Current assets are the assets that can be converted or are likely to be converted into cash within a period of one year. Below are the other features of current assets.

  1.  Current assets are expected to be realized or consumed or sold within a normal operating cycle of the business (usually a period of one year).
  2. Moreover, these assets are primarily held by the business for trading purposes.
  3. These assets are short term in nature.
  4. They are liquid in nature i.e. easily converted into cash within a short period of time or are present in the business as cash & cash equivalents.

For example cash & cash equivalents including cash at bank, Inventory, Accounts receivable, Short term investments, etc. ( as they all are expected to be converted into cash within a one-year period).

Non-Current Assets: 

Non – current assets are the assets that are held by the business for a longer duration and cannot be easily converted into cash within a short period of time (usually one year time). Below are the other  features of non- current assets:

  1. They are not intended to be sold within a period of one year and are retained for a longer duration.
  2. Non-current assets usually have a useful life of more than one year.
  3. They help the business to generate income/revenue for long periods.
  4. Non-current assets include fixed assets such as Plant & Machinery, office building, Furniture, etc. that are depreciated over their useful lives.

For example long-term investments, Property Plant & Equipment, Land, Building, Computer, Motor vehicles, etc. as they are used for a long duration and are not intended to be sold within a period of one year.

Final thought:

Assets are the resources that are important to run the business as without the assets there is no existence of the business.  From the goods that are sold to generate revenue to the fixed assets that are used to manufacture such goods, all are included in the assets of the company and are reported in the balance sheet of the company.

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Related Articles

  1. Basic Accounting Terms
  2. What are Liabilities?
  3. What are Expenses?
  4. What is Income?
  5. What is Owner’s Capital?

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