What is an asset?
An asset is anything you own that you expect to make or save you money in the future. It can be owned by a company, an organisation or an individual. In other words, an asset represents the value of ownership that can be converted into cash.
Where have you heard about assets?
Assets get talked about a lot when companies reveal their financial results – especially if they have been buying or selling a lot of assets. Assets are reported on a company’s balance sheet and are created or bought to increase its value.
You may also have heard of the controversial practice of asset stripping, where a company in difficulty gets taken over and its key assets are sold off for short-term gain, often at the risk of the company’s long-term future.
What you need to know about assets
To make sure you do not end up with too many eggs in one basket, investors are often advised to have a good spread of asset classes in their portfolio to diversify risk.
Assets can also be classified according to how easily they can be converted into cash. So liquid assets are things that can easily be cashed out – for example a savings account. Illiquid assets, on the other hand, are usually harder or slower to sell – for example property. Alternative assets can include fine wines, stamps, antiques and collectibles.
Broadly speaking, assets can fall into several categories, including current assets, fixed assets, financial investments and intangible assets.
- Current assets are considered short-term economic resources that are believed to convert into cash within a period of one year. They include cash and cash equivalents, inventory and accounts receivable.
- Fixed assets are long-term economic resources, such as equipment, buildings and plants. These resources are usually subject to an adjustment for aging, which is called depreciation.
- Financial assets are investments in securities and assets of other institutions. They include stocks, corporate and government bonds, and other securities.
- Intangible assets represent economic resources with no physical presence. They include trademarks, copyrights, patents and goodwill.
Actually, anything tangible or intangible that a company owns or controls, which is capable of producing economic value, works as an asset. You should note that employees are not considered assets in the same way as equipment or machinery are, even though they generate economic value.