asset

 

Asset & its classification

What is Asset?

Formally, an asset is a resource controlled by the entity as a result of past events or  transaction and from which future economic benefits are expected to flow to the en entity tity.. Simply, resources own by a business. Broadly, resources controlled by an entity resulting from past activities from which future economic benefits are expected to flow to the entity. For example- cash, accounts receivable, land, buildings etc.

Asset characteristics:

Pr Proba obabl bly y the the most most ac acce cept pted ed ac acco count untin ing g defin definit itio ion n of as asse sett is th thee one us used ed by th thee Intern Int ernati ational onal ccou ccounti nting ng Standa Standards rds Board. Board. !he follow following ing is a "uotati "uotation on from from the International Financial #eporting Standards $IF#S% Framewor&' (n asset is a resource controlled by the enterprise as a result of past events and from which future economic  benefits are expected to flow to the enterprise.) !his means that' •

!he probable present benefit involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or  indirectly to future net cash flows, and, in the case of not for profit organi*ations to provide services+

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!he entity can control access to the benefit+

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!he transaction or event giving rise to the entitys right to, or control of, the  benefit has already occurred.

 

mployees are not considered to be assets, li&e machinery is, even though they are capablee of generating future economic capabl economic benefits. benefits. !his is because an entity entity does not have sufficient control over its employees to satisfy the Framewor&s definition of an asset. Similarly, in economics an asset is any form in which wealth can be held.

Assets in Accounting:

In the financial accounting sense of the term, it is not necessary to be able to legally enforce the assets benefit for "ualifying a resource as being an asset, provided the entity can control its use by other means. !he accounting e"uation relates assets, liabilities, and owners owner s e"uity' ssets / 0iabilities 1 Stoc&holders "uity $2wners "uity% ssets / liabilities 1 3apital 0iabilities / ssets - 3apital 3apital / ssets - liabilities !hat is, the total value of a firm ssets are always e"ual to the combined value of its (e"uity( and (liabilities.( !he accounting e"uation is the mathematical structure of the balance sheet. ssets are listed on the balance sheet. In a companys certain divisions are re"uired by 4enerally ccepted ccounting ccounting Principles $4P%, which vary from country to country. ssets are formally controlled and managed within larger organi*ations via the use of  asset ass et tra trac&i c&ing ng tools. tools. !hese !hese monito monitorr the purcha purchasin sing, g, upg upgrad rading ing,, servic servicing ing,, lic licens ensing ing,, disposal etc., of both physical and non-physical assets.

 

Types Ty pes of Assets:

ssets can be divided into following groups' •

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3urrent ssets  5on-current ssets ssets

3urrent ssets'

3urrent assets are cash and other assets expected to be converted to cash or consumed either in a year or in the operating cycle $whichever is longer%, without disturbing the normal operations of a business. !hese assets are continually turned over in the course of  a business during normal business activity. !here are 6 ma7or items included into current assets' •

3ash 8 cash e"uivalents 9 it is the most li"uid assets, which includes currency, deposit accounts, and negotiable instruments $e.g., money orders, che"ue, ban&  drafts%.

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Short term investments investments 9 include securities securities bought and held for sale in the near  future to generate income on short-term price differences $tradi $trading ng securities%.

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#eceivables9 usually reported as net of allowance for non-collectable accounts.

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Inventory9 trading these assets is a normal business of a company. !he inventory value reported on the balance sheet is usually the historical cost or fair mar&et value, whichever is lower. !his is &nown as the lower of cost or mar&et rule.

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Prepaid expenses9 these are expenses paid in cash and recorded as assets before they are used or consumed

 

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 5on-current ssets' ssets'

n asset that benefits the business for several accounting years or which is not easily convertible to cash or not expected to become cash within one accounting period. For example : land, building, furniture, machinery, leasehold property etc.

On the basis of tangibility, assets can be converted into-

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!angible ssets

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Intangible ssets

 !angible ssets'

!angible assets are those that have a physical substance, such as currencies, buildings, real estate, vehicles, inventories, e"uipment, and precious metals. •

Intangible ssets'

Intangible Intang ible assets lac& of physi physical cal substance and usual usually ly are very hard to evaluate. evaluate. !hey include patents, copyrights, franchises, goodwill, trademar&s, trade names etc. !hese assets are amorti*ed to expense over 6 to ;< years with the exception of goodwill.