Assets are valuable resources owned by an individual, a company, or a government. They allow businesses to make money, increase value, and help the organization run. In modern business, assets can refer to any item or value, from physical property and equipment to financial resources and intellectual property.
In this article, we’ll explore the concept of assets and define this important term.
What Are Business Assets?
Assets’ business definition says that a business asset is a valuable resource a company owns and further uses to generate revenue.
Businesses invest in various assets depending on their specific needs and goals, such as real estate for retail stores or proprietary technology for product development. Companies typically use their assets in some way to make revenue.
Some common business assets examples are:
- Physical property: Any real estate owned by the company and any equipment or machinery used in business operations.
- Intellectual property: Any creative or innovative products of the mind, such as patents, trademarks, and copyrights.
- Human capital: The skills and knowledge of the company’s employees, which are used to achieve earnings and the company’s goals.
How Do Business Assets Work?
To further define assets in business, it’s important to understand the difference between assets and liabilities. Assets can be anything a company owns, while liabilities are owed. For example, a company’s inventory would be considered an asset, as it can be sold to make a profit. A company’s loan payments, on the other hand, would be viewed as a liability.
A balance sheet is a statement of financial position. It lists all of the company’s assets and liabilities and other corporate financial data. The order in which financial assets are listed on the balance sheet is telling – the most liquid assets are listed at the top, and items at the bottom of the company asset list are considered the least liquid. Asset liquidity depends on how easily the items in question can be converted to cash.
When liquidating your assets, you should be aware of asset depreciation and market value. The value of an asset changes over time, affecting how much of its worth you can write off. If you decide to sell your business’s assets for a profit, you may end up paying capital gains tax.
Types of Financial Assets
There are many different types of business assets. Some of the most common include cash, accounts receivable, inventory, investments, property, vehicles, and office furniture. Here’s what you need to know about different ways of classifying them:
Tangible and Intangible Assets
Tangible assets are physical in nature, and intangible assets are nonphysical. Both types are vital to businesses. A tangible asset is all physical and can be used to generate revenue through the company’s operations. Some tangible business assets examples include real estate, inventory, and vehicles.
On the other hand, intangible assets are nonphysical and include intellectual property, patents, or goodwill. Intangible assets do not need to be manufactured or physically built, but they can still be sold or licensed. A company can also earn intangible assets over time through unique activities or circumstances that set a business apart from its competition.
Current Assets and Noncurrent Assets
Current assets are fairly liquid and can be easily converted. They include cash, accounts receivable, and inventory. Current assets are used in operations or are expected to be turned into cash within a year.
Noncurrent assets, also known as fixed assets or long-term assets, are things such as property and equipment that can’t easily convert to cash.
Nonoperating and Operating Assets
The other way of categorizing different types of assets is by operating and nonoperating assets. Operating assets are used in the day-to-day operations of a business and include cash, inventory, and equipment. Nonoperating assets are not used in daily operations but may still be valuable to the company. They involve investments in other companies or property.
Assets in business can also be classified by their usage, convertibility, and physical existence.
Can the Value of Business Assets Change Over Time?
The value of business assets can change over time for several reasons. For example, an increase in demand for certain products may reduce inventory levels and lead to higher values for fixed assets like machinery and equipment. Changes in technology or consumer preferences can also impact the value of both tangible and intangible business assets.
As businesses evolve, it’s essential to keep track of the value of assets in business. A clear and accurate balance sheet can help make strategic decisions about how best to use and maintain resources. Ultimately, a company’s success will depend on managing business assets effectively and maximizing their potential value over time.
How To Determine the Value of an Asset
The value of an asset is the amount for which it can be sold or exchanged. It can be determined by several methods, including the cost and market methods.
The cost method is one of the simplest ways to determine the value of company assets. It only considers what it costs to purchase or produce the asset and not any other factors such as depreciation.
The market method considers factors such as supply and demand when setting the value of an asset. This method is more complex than the cost method but more accurately represents an asset’s worth.