Assets refer to resources controlled or owned by a person, corporation, or government with the idea that it will result in a positive economic value. There exist a wide range of assets, but the common types include physical, current, non-current, intangible, material, operating, and non-operating. Experts argue that for a company to excel in whatever industry it is working in, it should correctly identify and classify the types of assets. This is very important to its survival, especially its solvency and associated risks.
According to the International Financial Reporting Standards (IFRS), an asset is a type of resource controlled by an enterprise basing on past events and from which expectations of future economic benefits are based.
Types of Assets
Assets exist in many forms. Below are the most common types of assets:
- Account receivable
- Cash and cash equivalents
- PPE (Property, Plant and Equipment)
- Patents (Intangible asset)
Properties of an Asset
There exist three crucial properties of assets. They include:
- Ownership: They represent ownership that, at a later stage, can be turned into cash and cash equivalents.
- Economic value: Every asset has a monetary value. This means that they can be sold or exchanged.
- Resource: Assets are necessary resources that one can use to generate future economic benefits.
Classification of Assets
Assets are classified in three ways: they are:
- Physical existence: This is the classification of assets basing on their physical existence. An investment can be tangible or intangible.
- Convertibility: Assets are classified based on how easy they are to be converted into cash.
- Usage: This is the classification of assets basing on their use in a business operation.
Classification of Assets According to Convertibility
When you classify assets basing on their Convertibility into cash, you classify them as either current assets or fixed assets. Alternatively, this concept can also classify assets into short-term and long-term assets.
1. Current Assets
This refers to the type of assets that can easily be converted into money or cash equivalents (mostly within a year). This type of asset is also referred to as liquid assets. The most common type of current assets include items such as short-term deposits, cash & cash equivalents, inventories, account receivables, marketable securities, office supplies, etc.
2. Fixed or Non-current Assets
This type of asset refers to assets that cannot be readily or easily converted into cash & cash equivalents. People also refer to them as long-term assets, fixed assets, or hard assets. Non-current or fixed assets include items such as machinery, building, land, patents, trademarks, equipment, etc.
Classification of Assets According to Physical Existence
When you classify assets based on their physical existence, you classify them as tangible assets or intangible assets.
1. Tangible Assets
These are the type of assets with physical existence. This means that you can touch them, feel them, and see them. Tangible assets include equipment, building, land, office supplies, cash, marketable securities, inventory, etc.
2. Intangible Assets
These are the type of assets that don’t have a physical existence. Intangible assets include licenses and permits, trade secrets, trademarks, copyrights, brand, patents, goodwill, corporate intellectual property, etc.
Classification of Assets According to Usage
When you classify assets basing on the purpose or usage, you classify them as either operating assets or non-operating assets.
1. Operating Assets
These are the type of assets needed in the day-to-day running of a business. This means that operating assets are used to generate revenue from a business’s financial activities. Operating assets include items such as machinery, inventory, cash, accounts receivable, equipment, goodwill, copyrights, etc.
2. Non-Operating Assets
These are the type of assets that are not needed in the day-to-day running of a business but can still generate revenue. Non-operating assets include marketable securities, short-term investments, vacant land, interest income from a fixed deposit, etc.
Importance of Asset Classification
A business needs to classify its assets. For instance, when determining a company’s networking capital, sorting out the current assets from fixed ones is very important. Besides, for companies operating in high-risk industries, you need to understand which assets are tangible and those that aren’t to prevent potential damage.
Besides, figuring out which assets are operating and which ones are non-operating is key in determining the amount of revenue they have contributed. It also helps in determining the amount of revenue each asset yields.
Download Free Templates
Having known the importance of assets classification, you need to document all of that information. The best way to do so is by creating an asset list. Are you having challenges creating an asset list? Worry no more! We have designed a wide range of asset list templates for you to use. You can download our free and premium templates to get better guidance.
The importance of an asset list cannot be underestimated. They play a critical role in the success of a company. If you having trouble with creating one, use our readily available templates!