What is an Asset?
An asset is anything of value or a resource of value that can be converted into cash.
Individuals, companies, and governments own assets. For a company, an asset might
generate revenue, or a company might benefit in some way from owning or using the
asset.
Classification of Assets
Assets are generally classified in three ways:
1. Convertibility: Classifying assets based on how easy it is to convert
them into cash.
2. Physical Existence: Classifying assets based on their physical existence.
3. Usage: Classifying assets based on their business operation usage.
Classification of Assets: Convertibility
If assets are classified based on their convertibility into cash, assets are
classified as either current assets or fixed assets.
1. Current Assets
Current assets are assets that can be easily converted into cash and cash
equivalents (typically within a year). Current assets are also termed liquid
assets and examples of such are:
Cash
Cash equivalents
Short-term deposits
Stock
Marketable securities
Office supplies
2. Fixed or Non-Current Assets
Non-current assets are assets that cannot be easily and readily converted into
cash and cash equivalents. Non-current assets are also termed fixed assets,
long-term assets, or hard assets. Examples of non-current or fixed assets
include:
Land
Building
Machinery
Equipment
Patents
Trademarks
Classification of Assets: Physical Existence
If assets are classified based on their physical existence, assets are classified as
either tangible assets or intangible assets.
1. Tangible Assets
Tangible assets are assets that have a physical existence (we can touch, feel,
and see). Examples of tangible assets include:
Land
Building
Machinery
Equipment
Cash
Office supplies
Stock
Marketable securities
2. Intangible Assets
Intangible assets are assets that do not have a physical existence. Examples of
intangible assets include:
Goodwill
Patents
Brand
Copyrights
Trademarks
Trade secrets
Permits
Corporate intellectual property
client lists
franchise agreements
favorable finance or lease agreements
brand names
distribution networks
patents
proprietary processes or technology (or anything protected by copyright)
supplier contracts
skilled employees
Classification of Assets: Usage
If assets are classified based on their operational usage, assets are classified as
either operating assets or non-operating assets.
1. Operating Assets
Operating assets are assets that are required in the daily operation of a
business. In other words, operating assets are used to generate revenue.
Examples of operating assets include:
Cash
Stock
Building
Machinery
Equipment
Patents
Copyrights
Goodwill
2. Non-Operating Assets:
Non-operating assets are assets that are not required for daily business
operations but can still generate revenue. Examples of non-operating assets
include:
Short-term investments
Marketable securities
Vacant land
Interest income from a fixed deposit
Direct Expenses
Direct expenses can be traced to a specific product, service, customer, or project. These expenses
are typically easy to assign because you can trace them back to a specific project, product, or
even department. They are often used to determine the price of your products or services.
Direct expenses are generally (but not always) variable costs.
Examples of Direct Expenses
Examples of direct expenses include:
direct labor – i.e. the cost of paying employees to produce your products;
direct materials, including raw materials;
commissions; and
manufacturing supplies.
Indirect Expenses
Indirect expenses are trickier to assign to individual departments or projects because they cannot
be directly traced back to a specific product, service, customer, or project. They’re part of your
company’s overhead expenses and are the cost of maintaining your business, so they’ll exist
even if you’re not manufacturing a product or performing a service.
Although indirect expenses cannot be traced back to a specific service or product, it’s still
important to acknowledge indirect expenses when you’re pricing your products and
services.Indirect expenses are generally (but not always) fixed costs.
Examples of Indirect Expenses
salaries,
insurance,
depreciation of equipment,
equipment maintenance,
facility rent,
utilities,
office supplies, and
advertising and marketing.
