Asset – definition and meaning

In finance and accounting, an Asset refers to anything of economic value that we own. In fact, it is anything that a person finds useful or valuable.

Anything that we can convert to cash is probably an asset. Assets are items that people, companies, or even a country owns or controls. We also expect that assets will provide future benefit.

Additionally, companies see assets as items that they can use to meet debts, legacies, or commitments.

We record the value of assets in a company’s balance sheet. In other words, the items represent what companies own. Furthermore, assets include the money or other valuables 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.”

Assets have utility through several accounting periods. Expenses, on the other hand, do not have such utility, hence the name.

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

Other uses of “asset”

We can also use the term when talking about a person, skill, or quality. Look at the sentence below:

“She has been a great asset to the team.” In this context, “asset” means a benefit or positive contribution.

Here are more sentences using “asset” to describe a skill or quality:

  • “His ability to negotiate tough deals has been an undeniable asset to the sales department.”
  • “Her fluency in multiple languages is a valuable asset in our international company.”
  • “The engineer’s expertise in sustainable design has become a critical asset to our green initiatives.”

Tangible Assets

In business, we divide tangible assets into two subcategories:

  • Current Assets and
  • Fixed Assets.

For example, inventory consists of current assets.  Buildings, on the other hand, are fixed assets.

  • Current assets

We expect to sell or use a current asset during a business’s fiscal year. Examples of current assets include cash, cash equivalents, accounts receivable (money owed by customers), stock inventory. Short-term investments are also current assets.

  • Fixed assets

We also call fixed assets PPE. PPE stands for property, plant, and equipment. We only use fixed assets for the long-term rather than the short-term.

Examples of fixed assets include buildings, machinery, and tools. Computers and furniture are also fixed assets. We also write off fixed assets against profits over their lives by charging depreciation expenses.

Intangible assets

Intangible assets include all nonphysical resources and rights that a company owns. In other words, intangible assets are abstract things, rather than things we can touch.

An example of an intangible asset is goodwill. Trademarks and patents are also intangible assets.

International Accounting Standards Board standard 38 (IAS 38) defines an intangible asset as:

“An identifiable non-monetary asset without physical substance.”

US GAAP classifies intangible assets into:

– Purchased vs. Internally Created Intangibles, and

– Limited-Life vs. Indefinite-Life Intangibles.

Accountants typically expense these assets relative to their respective life expectancy.

We amortize assets with an identifiable useful life over their economic or legal life. The amount by which we amortize the asset equals its cost minus any residual value. Examples of intangibles assets with a finite useful life are patents and copyrights.

We reassess intangible assets with an indefinite life every year for impairments.

Opposite of asset is liability
Assets are things we own while liabilities are things we owe.

The Accounting Equation

Assets are an important component of the accounting equation because they structure a balance sheet:

Assets = Liabilities + Capital

Liabilities = Assets – Capital

Capital = Assets – Liabilities

Etymology of ‘asset’

Etymology means the study of the history of words and how they have evolved. Etymologists believe that the modern English word ‘asset’ came from the Old French assez (11 century). ‘Assez’ means “compensation, satisfaction, sufficiency”. The Latin ad satis means “to sufficiency”.

‘Asset’ started as a legal term in English, meaning “sufficient estate”, i.e. to satisfy legacies and debts. Its meaning in the 1500s included “any property that we can theoretically convert into cash.”

Looking after other people’s assets is known as asset management. In fact, asset management is a giant industry that globally exceeds $53 billion.

Strategic asset management also involves assessing the liquidity of assets, which is the ease with which they can be converted into cash without affecting their market value.

Compound phrases with “asset”

There are many compound phrases in the English language that start with the word “asset.” A compound phrase is a term that consists of at least two words. Here are some, with their meanings, and an example how to use them in a sentence:

  • Asset allocation

The process of dividing investments among different kinds of assets to optimize risk and return.
Example: “The financial advisor recommended a change in the client’s asset allocation to include more international equities.”

  • Asset turnover

A financial ratio that measures the efficiency of a company’s use of its assets to generate sales revenue.
Example: “The company’s asset turnover ratio improved this quarter, indicating better utilization of its assets.”

  • Asset tracking

The method of tracking physical assets, either by scanning barcode labels attached to the assets or by using tags using GPS or RFID.
Example: “With the new asset tracking system, the logistics company could optimize its inventory levels.”

  • Asset bubble

A situation where the price of assets rises rapidly to levels that are not supported by fundamentals, leading to an unsustainable situation.
Example: “The sudden collapse of the housing market was the bursting of an asset bubble that had been growing for years.”

  • Asset recovery

The process of maximizing the value of underperforming or surplus assets through various strategies including redeployment, resale, or recycling.
Example: “The asset recovery team was able to recoup significant value from the outdated production equipment.”

  • Asset management company

A company that invests its clients’ pooled funds into securities that match declared financial objectives.
Example: “They decided to entrust their retirement savings to a reputable asset management company for long-term growth.”

  • Asset manager

A professional or firm responsible for directing a client’s wealth or investment portfolio on their behalf.
Example: “The asset manager diversified the investments to protect the portfolio against market volatility.”

Video – What are Assets?

In this visual guide presented by our affiliate channel, Marketing Business Network on YouTube, we explain what “Assets” are using straightforward language and easy-to-understand examples.