What are Assets in Accounting?
In every business, assets play a vital role. They can encompass physical possessions like property, machinery, and equipment, as well as intangible resources like intellectual property, which enhance a company's products or reputation. Understanding your business assets and their accounting implications enables you to make informed decisions and accurately assess your enterprise's value. If you're unsure about the assets your business owns or the precise definition of an 'asset,' Mooncard is here to assist you. This article serves as a concise guide on assets, providing the necessary knowledge to identify your business assets and effectively incorporate them into your accounting processes. Read on to enhance your understanding of this essential aspect of your business.
What are business assets exactly?
It’s not always easy to define what an asset is in a business. A good way to think about it is to remember that an asset does not necessarily have to be a physical object. An asset is a resource that is owned by or controlled by a business enterprise, be that a company, a sole trader or a partnership.
An asset is typically a resource that can generate economic benefits for a business. These benefits can be in the form of direct financial benefits, such as a piece of machinery that produces products that can then be sold to the public. Or it can take the form of more nebulous benefits, such as the consumer recognition of a popular brand image.
Assets are usually exclusively owned by a business and are purchased either with cash, equity or debt. As they generate revenue, in accounting terms assets are considered to be the opposite of liabilities, which are defined as amounts or services a business owes to other entities. Business assets can be used as collateral for loans or as leverage to attract investors. A company’s balance sheet will list all its assets and how they were acquired or financed.
Understanding the types of assets in your business
When talking about assets in accounting terms, it is crucial that all the assets owned by a business are categorised in the correct manner. If an asset is not listed in the right category, it may not reflect its true worth. This can diminish the likelihood of a business obtaining funding from investors or a loan from a bank. Also, if an asset is not correctly valued, then a business may find that they are underinsured. Additionally, understanding the difference between types of assets assists greatly in assessing the solvency of a business and how much risk it can absorb.
In general, there are six asset categories. It is important to note that assets may belong to multiple categories, or they may just fit in one category. The six main asset categories are:
- Current assets
- Fixed assets
- Tangible assets
- Intangible assets
- Operating assets
- Non-operating assets
Current assets can be defined as anything that has a short-term lifespan and is expected to be consumed or be turned into cash - or a cash equivalent - within the space of at least one financial year or accounting period. Sometimes, these types of assets are referred to as ‘liquid assets’, as they can relate to the liquidity of a business. Typically, current assets facilitate the daily operations of an enterprise. Examples of current assets include:
- Cash equivalents, such as cryptocurrency, bonds, bank certificates of deposits, shares, and so on
- Marketable securities
- Short-term investments
- Accounts receivable
Conversely, a fixed asset is something that cannot be turned into cash within a financial year or an accounting cycle. These types of assets are also known as ‘long-term assets’ or ‘non-current assets’. When being accounted for, the value of fixed assets must include depreciation over time. This depreciation can also show the reduced earning power of the fixed asset over time. Fixed assets can include:
- Real estate
- Long-term investments
Any object that has a physical presence and adds value to a business can be categorised as a tangible asset. Examples of common tangible assets include:
- Office supplies
Anything that can provide economic benefits to a business but does not have a physical presence can be defined as an intangible asset. Typically, intangible assets provide long-term benefits to an enterprise. These types of assets must often be protected by registering intellectual ownership or by another form of legal documentation. Examples of common intangible assets include:
- Theme songs
- Consumer goodwill
- Research and development
If a business utilises an asset in its core daily activities to create revenue, then this asset can be considered an operating asset. There are many different types of operating assets, including:
- Real estate
- Office supplies
Non-operating assets can be defined as anything that does not assist an enterprise in generating revenue through its core activities and operations but still assist the business by creating revenue via other means. Typical examples of non-operating assets include:
- Spare or unused equipment
- Marketable securities
- Short-term investments
- Unallocated cash
- Unused land
How to determine the value of an asset
An accountant must use different methods when calculating the value of an asset. Whatever method is used, the accountant needs to bear in mind that any asset will lose value over time. Tangible assets must be valued with the rate of depreciation in mind while intangible assets are valued – if they can be valued – by calculating the amortization of the asset.
Generally, there are four accounting methods that are used to place value on business assets:
- The cost method: This method places a value on an asset based on the price the business originally paid for it
- The fair market value method: This method determines the value of an asset based on what price it may sell for if offered on the open market. Often, a business will bring in an expert to appraise the asset in question to arrive at a fair market value
- The base stock method: This method most often applies to inventory. The value of inventory is calculated at the acquisition cost of the minimum amount of inventory a business requires to maintain operations
- The standard cost method: This method entails the accountant applying the estimated costs that an asset may incur during its lifetime to ascertain its future value. To reach a figure, the difference between actual costs and expected costs is recorded and compared based on the company’s experience with the asset. The differences between these figures are called variances. There are favourable variances and unfavourable variances. If an asset performs well and its estimated costs are lower than its actual costs, then this is known as a favourable variance. Conversely, an unfavourable variance is where an asset performs poorly, and the expected costs exceed the actual costs
How assets function in accounting
When it comes to creating a balance sheet or a financial statement, a bookkeeper will need to have a comprehensive list of all a business’s assets. These assets will then need to be categorised so as to assign value to them.
However, it should be noted that when creating a balance sheet, assets generally fall into only two categories: fixed assets and current assets. This is done because it can be extremely difficult to assign real-world values to intangible assets such as logos or brand reputation. If an intangible asset cannot be correctly valued, then it cannot be included in financial statements or on a balance sheet.
Once all the assets are included on the balance sheet or financial statement, the true net worth of the business can be calculated. This information can then be used to gain investments or listed as collateral to secure a loan from a financial institution. This data can also be used to determine the growth pattern of a business and assists business owners in making key decisions regarding strategies to develop the enterprise.
One of the ways in which you can streamline your accounting procedures is by using the Mooncard payment system. Mooncard allows you to create a digital record of every purchase made on behalf of a business. When a purchase is made, an employee takes a digital photo of the receipt. An expense report is automatically created using prepared data and sent to your accounting department instantly.
You will always have a record of all expenses that you can access at any time. This can assist accountants in tracking cash flow and makes it simpler and faster to submit tax reports. If you would like to see exactly how the Mooncard payment system can help your business, get in touch via our website to organise a free, no-obligation demonstration.