An asset by definition is a “resource in the control of the entity from which economic benefits are expected to be flown towards the entity“.
Now if we bifurcate above definition of asset, there are few keywords which are of extreme important, these words are following:
It should be something of value, from which some benefit may be derived for the business. For example, a building is a resource which can be used to conduct business and sale goods/services. If it is something which is valueless, it cannot be booked as the asset.
Entity should have control over the resource. So that the entity can control the asset as per its business needs. If entity doesn’t have control on the asset, it cannot book it as it’s asset in its accounting records.
For example, ‘sun’ is a resource but no entity has the control over it. So a business cannot record it as its asset.
Flow of economic benefits:
There should be a likelihood that the entity shall get some economic rewards by using that asset in appropriate way. These economic rewards may be either in terms of inflow of money or reduction in outflow of expenses.
For example, if a company possess a bus which it uses for the transport of its staff, then this bus is providing economic benefit to the entity in terms of reduction in cost of outsourcing staff transportation.
Classification of assets
Broadly speaking there are 3 types of assets i.e., current assets, non-current assets and intangible assets. Below we’ll discuss these and some other types of assets which can be classified within these 3 types of assets.
Current assets are those assets which have a short-term life (usually a year or less than that). These are assets which are likely to be consumed/replenished/sold/utilized in a year or less than that. For example, receivables, trading stock, cash and bank balance etc.
Non-current assets, also referred to asset fixed assets, are those assets which usually have a useful life of more than 1 year. For example, if a company purchases furniture for its office, this furniture is likely to last for more than 1 year and thus it will be classified as non-current (or fixed) asset. Other examples are buildings, motor vehicles, electrical equipment, computer software and machineries.
Intangible assets are those which cannot be touched and felt physically. They don’t have a physical existence. These assets may or may not be visible. These are the assets which exist normally in electronic format like computer software, movie, design, key ideas etc. Another good example of intangible assets is goodwill.
Tangible assets are those which can be touched and felt physically like computers, mobiles, telephones, cars, buildings etc.
Financial assets are those assets which would be settled in transfer of money in the favor of the asset holder. For example, accounts receivables, cash and cash equivalents, short term deposits with banks or other financial institutions.
Liquid asset This term refers to the assets which easily gets converted to cash or already is cash. Cash is the most liquid form of the assets. Other easily cash convertible assets are debtors and stock.
Illiquid assets are those assets which may require significant time to convert into cash. This time may be a 6 months or more than that. For example, it may take significant time to sale a building than to sale a product on a retail shop.