Here are some basics about assets, and be sure to reinforce your learning with our free quiz at the end!
What Is An Asset?
An asset is a present economic resource controlled by an entity as a result of past events and has the potential to produce future benefits. If you bought (the past event) a stock (the present economic resource) that pays dividends (future benefit), then the stock is considered an asset.
In simpler terms, an asset is something you own that generates money.
Assets are mainly categorised into current and non-current assets based on their liquidity (how fast they can be converted to cash). They can also be grouped based on how their value changes over time (appreciating or depreciating) or their physical presence (tangible or intangible).
Current Assets
Current assets are short-term business assets expected to be used or converted to cash within a year or the company’s normal operating cycle. They allow an entity to pay its day-to-day operating expenses and cover its short-term liabilities.
Current assets are the most liquid business assets as they can be easily converted to cash. The most common current assets, in order of liquidity (most liquid to least liquid), include:
| Current Asset | Asset Explanation | Conversion to Cash Timeframe |
| Cash and cash equivalents | Physical cash Bank balances Highly liquid investments (government bills) | Physical cash and bank balances are already in cash form. Highly liquid investments – 90 days and less. |
| Accounts receivables | Customer balances owed to the business for goods/services purchased on credit. | Usually 30-90 days |
| Inventory | Goods held by a company for sale. | Can take up to a year to be sold for cash. |
The first two current assets in the table above will appear on most companies’ Statement of Financial Position. Inventory will only appear if the company has physical goods to sell. If the company is a pure software business, inventory will not appear.
Some statements of Financial Position may include line items called ‘other current assets’ and ‘marketable securities’. Other current assets usually comprise balances like prepaid expenses and interest receivable due to be collected within a year. Marketable securities include short-term investments (like stocks and bonds) that can be easily converted to cash or securities a company plans to sell within a year.
The difference between cash equivalents and marketable securities is that cash equivalents usually have a maturity (when the cash equivalent will become cash again) of 90 days or less and are easily converted into a known cash amount.
Because of their daily price fluctuations, stocks can’t be converted to a known value and aren’t considered cash equivalents. While bonds can be converted to a known amount, if their maturity is longer than 90 days, they can’t be considered cash equivalents.
Non-Current Assets
Non-current assets are long-term assets held in the business for continuing use. These assets are not expected to be consumed or converted to cash within a year or the business’ operating cycle. By their very nature, non-current assets are the least liquid assets – they take longer to be converted to cash.
Non-current assets are held for extended periods because of their importance in revenue generation. A manufacturing company can’t function without a factory, a restaurant chain can’t function without buildings, and a software company can’t operate without computers. Non-current assets, in some way, are the foundations for companies.
Types of non-current assets, with examples, include:
| Non-Current Asset | Examples |
| Property, Plant and Equipment (PPE) | Land Buildings Machinery Business equipment |
| Intangible Assets | Patents Trademarks Copyrights Goodwill |
| Long-Term Investments | Stocks, bonds and other financial instruments Investments in subsidiaries and joint ventures |
Tangible vs Intangible Assets
The main difference between tangible and intangible assets is physical presence, and because of this, they differ in year-end assessment, valuation and significance to the business. Tangible assets can be seen, touched and counted (they have a physical presence), while intangibles can’t – intangible assets have no physical presence.
The following table summarises the differences between tangible and intangible assets.
| Asset Feature | Tangible Assets | Intangible Assets |
| Physical presence | Yes | No |
| Year-End Assessment | Depreciated over its useful economic life | Amortised (if finite life) or tested for impairment (if indefinite life) |
| Valuation | Easier since value can be determined through sales, appraisals or other market transactions. | More complex since value is determined based on estimates of future benefits. |
| Business Significance | Provides physical infrastructure for a business’ operations and the production of goods and services. | Often drives a company’s competitive advantages, protecting its future revenue streams and profits. |
| Examples | Property, Plant and Equipment (PPE) | Patents, trademarks, copyrights, goodwill |
The Crossover Between Liquidity and Tangibility
Cash is a current asset, but that doesn’t mean it’s only a current asset – assets overlap categories. Assets can be current and tangible, current and intangible, non-current and tangible or non-current and intangible.
The following table gives asset examples of the four possible combinations based on liquidity and tangibility.
| Current Asset | Non-Current Asset | |
| Tangible Asset | Cash Inventory | Buildings Machinery |
| Intangible Asset | Accounts receivable Marketable securities | Patents Marketable securities |
This is not an exhaustive list but a sample of assets that fall under each category.
Appreciating vs Depreciating Assets
Besides liquidity and tangibility, assets can also be categorised based on how their value changes over time, whether they increase (appreciate) or decrease (depreciate) in value over time.
Appreciating assets tend to increase in value over time and can provide significant returns if held for long periods. Of course, appreciating assets can lose value at points due to market conditions (stocks and real estate are great examples), but their overall trajectory is up – to gain value with time.
Depreciating assets, on the other hand, tend to decrease in value over time, usually due to wear and tear. Obsolescence (becoming outdated) is another reason assets lose value. Depreciating assets, like machinery and equipment, can increase in value through revaluation (often done before an asset is sold), but their overall trajectory is down – to lose value with time.
Summary
An asset is a present economic resource controlled by an entity as a result of past events and has the potential to produce future benefits. They can be categorised based on liquidity (current or non-current), tangibility (tangible or intangible) and how their value changes over time (appreciating or depreciating).
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