What Is an Asset? Definition, Types, and Examples

What Is an Asset?

An asset is a resource with economic value that an individual, a company, or a country owns or controls with the expectation that it will provide a future benefit.

Understanding Assets

Individuals usually think of assets as items of value that they could convert into cash at some future point and that might also be producing income or appreciating in value in the meantime. Those can be financial assets like stocks, bonds, and mutual funds, or physical assets like a home or an art collection.

In the case of businesses, an asset may be something that has the potential to generate cash flow, reduce expenses, or improve sales, regardless of whether it's a tangible asset like manufacturing equipment or a fleet of trucks or an intangible asset like a patent or a trademark.

For something to be counted as one of its assets, a company must possess a right to it as of the date of the company's financial statements.

Types of Assets

In corporate accounting, assets are reported on a company's balance sheet and can be broadly categorized into current (or short-term) assets, fixed assets, financial assets, and intangible assets.

Current Assets

Current assets are short-term economic resources that are expected to be converted into cash or consumed within one year. Current assets can include cash and cash equivalents, accounts receivable, physical inventory, and various prepaid expenses.

While cash is easy to value, accountants must periodically reassess the recoverability of inventory and accounts receivable. If there is evidence that a receivable might be uncollectible, it will be classified as impaired. Or if inventory becomes obsolete, companies may have to write off those assets.

Fixed Assets

Fixed assets are resources with an expected life of greater than a year, such as plants, equipment, and buildings. An accounting adjustment called depreciation is made for fixed assets as they age. It allocates the cost of the asset over time. Depreciation may or may not reflect the fixed asset's loss of earning power.

Generally accepted accounting principles (GAAP) allow depreciation under several methods. The straight-line method assumes that a fixed asset loses its value in proportion to its useful life, while the accelerated method assumes that the asset loses its value faster in its first years of use.

What's considered useful life varies according to the type of asset. For example, under the general depreciation system (GDS), the Internal Revenue Service (IRS) assigns office furniture and fixtures a useful life of seven years, while cars and trucks get a useful life of five years.

Financial Assets

Financial assets can include stocks, corporate and government bonds, and other types of securities. Unlike fixed assets, they tend to be liquid, and they are valued according to their current price on the relevant market.

Intangible Assets

Intangible assets are economic resources that have no physical presence. They include patents, trademarks, copyrights, and goodwill. Similar to the depreciation process for fixed assets, intangible assets can be amortized over their useful life for accounting and tax purposes.

Assets vs. Liabilities

While an asset is something of economic value that's owned or controlled by a person, company, or government, a liability is basically the opposite—something that is owed to another person, company, or government. Examples of liabilities include loans, tax obligations, and accounts payable.

The Bottom Line

Assets are basically anything of value that an individual, a business enterprise, or another entity owns. Different types of assets are treated differently for tax and accounting purposes. Generally speaking, assets are a good thing to have, and liabilities less so.