Assets encompass anything that can be owned by a company or an individual, capable of being sold for cash. Typically, assets generate income or add value to the owner. In financial accounting, assets are recognized as economic resources, which may be physical objects or intangible concepts that can be utilized and owned to create value. They are considered to have real and positive value for their owners and must be convertible into cash, which itself is also an asset.
Accountants and accounting processes recognize various categories of assets. These categories include current assets, long-term assets, intangible assets, and deferred assets. Current assets comprise cash and other items that can be quickly and easily sold to raise cash. Long-term assets are those held for extended periods, such as factory plants, real estate, and equipment. Intangible assets are non-physical rights or concepts, like patents, trademarks, goodwill, and copyrights. Deferred assets involve expenditures made now for future costs, such as rent, insurance, or interest.
While tangible, physical assets are easily comprehensible, intangible assets often prove challenging for individuals to grasp. Despite lacking a physical form that can be touched, these assets still possess value that can be managed and sold to generate cash. Intangible assets encompass rights and resources that provide a company with a competitive edge in the marketplace. These assets can encompass a range of elements beyond the common examples, such as software, stocks, bonds, and accounts receivable.
On balance sheets, tangible assets are often further divided into fixed and current assets. Fixed assets refer to objects that are immobile or not easily transportable, such as buildings, office locations, and equipment. Current assets consist of a business’s inventory.
Balance sheets track a company’s assets and their value in monetary terms, including both cash and other owned items. It is essential to differentiate assets from liabilities. Assets create positive cash flow, representing money entering a business, organization, or individual’s accounts, while liabilities are obligations that must be paid, creating negative cash flow or taking money out of accounts. For example, rental properties that generate more monthly rent than their expenses, interest, and upkeep are assets. Conversely, homes with monthly payments and do not provide any income stream to effectively offset these expenses.
