Asset – definition and meaning

In finance and accounting an asset is defined as anything of economic value that can be owned.

Virtually anything that can be converted to cash is an asset. Usually, assets are considered to be items of economic value that an individual, corporation or country owns or controls, with the expectation that it will provide future benefit.

The value of assets are recorded in a company’s balance sheet – representing what they own. Assets include the money or other valuables (with monetary value) that an individual or business owns.

The International Accounting Standards Board defines an asset as “a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”

The two main classes of assets are tangible assets and intangible assets.

Tangible Assets

Tangible assets are divided into two subcategories: current assets (such as inventory) and fixed assets (such as buildings).

Current assets – a current asset is an asset that is expected to be sold or used during a business’s fiscal year. Examples of current assets include cash, cash equivalents, accounts receivable, stock inventory, and short-term investments.

Fixed assets – fixed assets are also known as PPE (property, plant, and equipment). These assets are used for the long-term. Examples include buildings, machinery, computer equipment, tools, and furniture. Fixed assets are written off against profits over their life by charging depreciation expenses.

Intangible assets

Intangible assets include all nonphysical resources and rights that a company owns, such as goodwill, trademark, and patents.

International Accounting Standards Board standard 38 (IAS 38) defines an intangible asset as: “an identifiable non-monetary asset without physical substance.”

The Financial Accounting Standards Board Accounting Standard Codification 350 (ASC 350) defines an intangible asset as an asset that has no physical substance.

Under US GAAP, intangible assets are classified into: Purchased vs. internally created intangibles, and Limited-life vs. indefinite-life intangibles. These assets are usually expensed relative to their respective life expectancy.

Asset with identifiable useful lives are amortized over its economic or legal life. The amount amortized is its cost minus any residual value. Examples of intangibles assets with a finite useful life include patents and copyrights.

Intangible assets with an indefinite life are reassessed on a yearly basis for impairment.

The Accounting Equation

Assets are an important component of the accounting equation (which structures a balance sheet):

The accounting equation:

Assets = Liabilities + Capital

Liabilities = Assets – Capital

Capital = Assets – Liabilities

Etymology of the word “asset”

The modern English word ‘asset’ is thought to come from the Old French assez (11 century), meaning “compensation, satisfaction, sufficiency”. The Latin ad satis means “to sufficiency”.

It started as a legal term in English, meaning “sufficient estate”, i.e. to satisfy legacies and debts, and passed into general use in the late 1500s to mean “any property that theoretically can be converted into ready money.”

Looking after other people’s, organizations’ and governments’ assets is known as asset management, an industry that globally exceeds $53 billion.

Video – What is an asset?