An ASSET is something which has ownership (it is owned by an individual or a corporate entity) and which has value. These two factors, ownership and value, mean that an asset can be bought and sold. Reasons for buying an asset generally include:
Example: A person might buy a block of land as an investment in the hope that in a number of years time they can sell it for much more thatn they paid for it. They may in fact realise a profit without undertaking any activities to increase the value of the land.
Example: A person might buy tools or machinery which they can use to undertake work and create an income of themselves.
Example: A person might buy a painting that they like without any concern whether it will increase in value, or whether they will ever sell it to regain the money they paid. They may buy the painting simply because it has sentimental value, or they just want it on their wall.
For students of accounting, it is important to know that Assets, current, fixed or intangible, are always an item that must appear on the Balance Sheet.
There are several sub-classes of assets including:
These are assets that are purchased for long-term use and which retain value in the long term. Businesses use Fixed Assets to produce profit. For example, a business buys "Plant and Machinery" to produce goods that it sells to make profit. A farm buys "Land" to produce food which it sells for a profit. An Electrician might buy a "Motor Vehicle" so that they can carry on their business.
These are assets that are either cash or are continually converted into cash in short timeframes (less than one year). If a business buys good for resale at a profit (such goods are known as 'Stock' or 'Inventory'), then such goods are deemed to be Current Assets because it is likely they will be sold and converted into cash with a short amount of time. Money that is also owed to the business(known as 'Accounts Receivable') is also viewed as a Current Asset. Such debts are usually converted into cash within short timeframes of less than 90 days.
These are assets that cannot be seen, touched or measured but nevertheless they exist! Examples of Intangible Assets include 'Goodwill' , 'Intellectual Property', 'Brand Name' and 'Trade Secrets'. If a person buys a business they will have to pay an agreed price. This price is often much more than the net value of its assets. The difference between what the business is bought for and what the value of its assets are, is called Goodwill. It is a strange term but a relatively simple concept. Goodwill can be thought of as the knowledge and know-how that has been built up over the years within the business. For example, the business will have a valuable customer database. In terms of 'Intellectual Property', a business may own Patents, Copyright and Trademarks all of which have value. Think of a Computer Fixing business in which the staff, over 10 years period, developed excellent manuals on how to fix computers. This knowledge, captured in the form of manuals, would be worth much to someone buying the business, particularly if they were just starting out.