In simple terms, an asset is something that belongs to or is valuable to a particular entity. It’s anything that an entity possesses or holds and which can create value for that entity. One of the most common examples of assets is money. Money can be easily seen as a tangible asset, because it is something that people can physically touch and which has a particular inherent value.
Some other examples of assets include tangible personal property like homes, cars, businesses, and investments. There are also non-asset types of assets such as goodwill, accounts, and franchises. Non-asset types of assets are not easily seen as an asset. Examples of non-asset types of assets are accounts receivable, inventory, accounts payable and retained earnings.
The two major classes of assets are tangible and non-tangible. While some tangible assets like land and buildings are obviously harder to replace, many intangible assets such as knowledge, reputation, and patents are not so fixed. Knowledge, for example, is a resource that virtually anyone on the planet could learn to some extent. Reputation, on the other hand, is a quality that could be easily earned by serving the community well for years. Patents, on the other hand, is a property right that confers ownership of the inventions described in them to the original inventors.
Assets can be classified in different ways. The most common is to see them as either fixed assets or variable assets. Fixed assets like equipment and houses are usually regarded as physical assets. These are usually produced or consumed on a daily basis and do not vary much from their physical form. Examples of fixed assets are cars, houses, and office furniture. Non-physical assets, on the other hand, are ones that are not produced or consumed on a day-to-day basis and therefore are not physical but may have a financial value only in the future.
Variable assets, on the other hand, are ones that may change with time. Some examples include inventory, accounts receivable, accounts payable, and personal assets. They are usually purchased or acquired to increase the production, sale, or income of a business. In order to increase personal assets, for example, an individual may open a store or hire employees.
Fixed assets include physical assets and non-financial assets. A physical asset is one that cannot be altered without making drastic changes to the production or location of the asset. Examples of physical assets include automobiles and homes. Non-financial assets, on the other hand, include intellectual property, capital assets, investments, and marketable securities.
To properly categorize an asset, one must first realize what exactly it is. In a nutshell, an asset is a non-cash economic resource. That being said, assets can have cash values but are not considered as economic resources because of their scarcity. Assets that are tangible and have a definite price are considered as non-cash economic resources because their prices cannot be changed without altering the asset itself. An asset can only become non-cash if it is no longer required to generate cash flow and can be sold or transferred to another firm for cash consideration.
Assets can also be divided into two categories: long-term assets and short-term assets. Assets in the long-term category, such as plant and equipment, are required to be produced over a period of years and usually cannot be replaced. On the flip side, assets that generate cash flow (such as patents) are relatively easy to replace or sell. Patents represent the future of intellectual property. Therefore, innovations in the area of patents can dramatically impact an individual’s ability to compete in today’s marketplace.