An asset is simply a material good with real value that an individual, institution, or state owns or controls with the hope that it will give a future advantage. Assets are generally reported on the balance sheet of a company and are either purchased or created in order to increase the value of a company or benefit the company’s operations over time. Assets may also be sold to realize the payment of debts or to pay current expenses.
A company generally creates assets when it buys goods or services that are not liquid or does not yet have a market price. The value of these goods or services is then converted to cash within the company. Assets also can be converted from raw materials into finished products. They can be converted from plant and equipment into service and product offerings. All of these types of assets to create a stock of material and cash within the business.
In order for an entity to operate profitably, it must have various types of financial assets. Examples of financial assets are cash, accounts receivable, accounts payable, accounts stored equipment, accounts receivable, inventory, retained earnings, goodwill, and property, plant, and equipment. Generally, these financial assets are purchased with money borrowed from banks. However, the term “financial assets” does not always mean “borrowed money”.
Some examples of mutual funds are funds that collect interest from customers and distribute it among the investors. The money from the customer is considered an investment in the fund and as such, the interest rate is adjusted to allow investors to receive a higher rate of return. Accounts receivables from customers are considered assets in the account. The money itself is considered an asset because it represents a sale of goods or services.
Many businesses use the equity method of accounting. This is the method used by most large businesses and also accounts for many small businesses. Equity is the income or gain created from the sale of some of the company’s financial assets. The difference between the financial value of the assets and the current financial value of the liabilities is what is used to determine the company’s net worth.
Many different methods are used to classify assets. One way is to consider the current price of the products or services and compare it to the book value of the same items. Other ways include the sell value of the fixed assets or the fair market value of the option instruments. Other methods of classifying assets are based on the credit risk of the firm.
Fixed assets tend to be safer to invest in than economic resources. A firm with a fixed capital structure has the advantage that its financial condition does not change significantly throughout the year. However, the disadvantage of this asset is that the assets cannot be turned over to liquidate it and the owner must continue to pay interest and dividends. Many firms find that these assets often generate cash flow even during slow economic periods.
Another type of non-traditional asset is the convertible asset. The convertible asset is an asset that can be converted into cash when required. It is often the result of a transfer or sale of an asset that produces cash quickly. Many businesses use convertible bond funds as a source of liquid cash because they convert the bond into cash in times of need.
The difference between intangibles and a financial asset is determined by its cost. Cost refers to the amount of payment needed to transform a non-financial asset into a financial asset. Some intangibles such as plant and equipment depreciate in value over time and their cost is easier to measure as a direct deduction from gross book value. On the other hand, many tangible assets have a longer life span and are difficult to value directly. These assets may include goodwill and reputation.
One of the major challenges for any firm is how to record an asset correctly. Most business owners do not know how to record these assets on their balance sheet correctly. The first step to understand the asset category is to understand how to determine their cost. How do you arrive at a cost? First, consider how you would value the assets in your book, based on current market prices, for each individual category: assets, liabilities, and other category; and, how you will measure your business assets using those categories to calculate your cost.
Once you have completed this process, compare the value of each category relative to your gross and net worth; see how the results vary. If there is a discrepancy, look for explanations why the values are different. If the differences are significant, review your accounting policies and identify why the values are different. The purpose of your balance sheet is to provide an accurate reflection of your total assets, less liabilities; if you discover an error in your presentation, it can significantly alter your gross and net worth statement.