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Overview of Assets
Definition of
Assets
What are Assets? In accounting, assets are resources with economic value that an individual, company, or country owns or controls with the expectation that they will provide future benefit. Assets are reported on a company's Balance Sheet and represent one part of the fundamental Accounting Equation: Assets = Liabilities + Equity. Assets can be broadly categorized:
- Current Assets: Expected to be converted to cash or used up within one year or operating cycle (e.g., cash, Accounts Receivable, inventory, prepaid expenses).
- Non-Current Assets (Fixed or Long-Term Assets): Not expected to be converted to cash within one year (e.g., land, buildings, equipment, machinery, intangible assets like patents or trademarks).
Activities Related to
Assets
Here is a list of Asset related activities:Â
Purchasing equipment or supplies, Managing cash reserves, Collecting payments from customers (Accounts Receivable), Managing inventory levels, Acquiring property or buildings, Tracking fixed assets, Recording asset values in the General Ledger, Calculating and recording Depreciation or Amortization, Selling or disposing of old assets, Performing asset impairment tests, and Reporting asset balances on financial statements.
Engaging in these activities involves acquiring, using, valuing, and disposing of the resources a business owns.
The Importance of
Assets
Assets are fundamentally important because they represent the resources a business uses to operate, generate revenue, and create value. For small business owners, accurately tracking and managing assets is crucial for several reasons: it helps assess the company's financial health and solvency, supports decision-making regarding investments and resource allocation, provides collateral for securing loans, and forms the basis for calculating key performance indicators. Precise bookkeeping ensures that assets are correctly recorded, valued, and depreciated/amortized according to accounting principles, leading to reliable financial statements. Effective asset tracking helps manage these resources efficiently.
Key Aspects of
Assets
Owned or Controlled Resources
Assets represent items of economic value that the business has control over due to past transactions or events.
Future Economic Benefit
The core characteristic of an asset is its ability to provide future economic benefits, such as generating revenue directly or indirectly, or being converted into cash.
Balance Sheet Presentation
Assets are presented on the Balance Sheet, typically ordered by liquidity (how quickly they can be converted to cash), and categorized into current and non-current sections.
Concepts Related to
Assets
Assets are a cornerstone of the Accounting Equation and the Balance Sheet, balanced against Liabilities and Equity. They can be Tangible (physical substance) or Intangible (non-physical). Long-term assets are subject to Depreciation (for tangible) or Amortization (for intangible) over their useful lives. Current assets like cash and Accounts Receivable are key components of Liquidity and Working Capital calculations. The efficiency with which assets generate profit can be measured by ratios like Return on Assets (ROA).
Assets
in Action:
The Adventures of Coco and Cami
Follow the entrepreneurial journeys of Coco, who's opening a sandwich shop, and Cami, starting a coffee shop, as they find themselves faced with the new challenges of bookkeeping to track their businesses.
Watch as Professor A breaks down the fundamental concepts of bookkeeping for Coco and Cami, explaining why it's the essential foundation for understanding a business's financial health.