Asset

In business and accounting by asset is meant economic resources controlled by an entity as a result of past transactions or events and from whichfuture economic benefits may be obtained.

Asset characteristics

Assets have three essential characteristics:

• They embody a future benefit that involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;

• The entity can control access to the benefit; and,

• The transaction or event giving rise to the entity’s right to, or control of, the benefit has already occurred.

It is not necessary, in the financial accounting sense of the term, for control of access to the benefit to be legally enforceable for a resource to be an asset, provided the entity can control its use by other means.

It is important to understand that in an accounting sense an asset is not the same as ownership. In accounting, ownership is described by the term “equity,” (see the related term shareholders’ equity). Assets are equal to “equity” plus “liabilities.”

The accounting equation relates assets, liabilities, and owner’s equity:

The accounting equation is the mathematical structure of the balance sheet.

Assets are usually listed on the balance sheet. It has a normal balance, or usual balance, of debit (i.e., asset account amounts appear on the left side of a ledger).

Similarly, in economics an asset is any form in which wealth can be held.

Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board ^[۱]. The following is a quotation from the IFRS Framework: “An asset is 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 are formally controlled and managed within larger organizations via the use of asset tracking tools. These monitor the purchasing, upgrading, servicing, licensing, disposal etc., of both physical and non-physical assets.

 Classification of assets

Assets may be classified in many ways. In a company’s balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country.

US GAAP

U.S. Generally Accepted Accounting Principles (GAAP) are currently promulgated and codified by the Financial Accounting Standards Board (FASB) at the pleasure of the Securities and Exchange Commission (SEC)^[۴], the government body authorized by the Securities Acts of 1933 and 1934 to prescribe accounting principles to be employed in public financial transactions.

Under US GAAP, the fundamental definition of an asset is as follows: “Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.”

The following is an example of classification according to US GAAP.

Current assets

Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets:

1. Cash – it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, checks, bank drafts).
2. Short-term investments – include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).
3. Receivables – usually reported as net of allowance for uncollectible accounts.
4. Inventory – trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the “lower of cost or market” rule.
5. Prepaid expenses – these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also adjusting entries.

The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities.