What are assets?
Assets are anything with monetary value owned by individuals, governments, and companies. Assets are acquired through a transaction or financial event, and they may generate future economic benefits. Virtually all organizations have to own an asset of some kind in order to conduct business, and the more assets the group has the more profitable it is likely to be.
Businesses record their assets on a balance sheet. Assets can be classed as either be tangible, such as land, furniture, raw materials, or equipment, or intangible, such as technical expertise, leases, copyrights, patents, or goodwill. For accounting purposes, research and development is sometimes considered an intangible asset. Tangible assets can also be grouped into two categories:
Current assets are cash on hand or an asset that can be readily converted into cash, which is called liquidity. Such an asset can be sold or traded with little to no impact on its value. Currents assets are also a factor in the current ratio and quick ratio, two formulas that help an investor or accountant determine a company’s health. Inventory, stocks, bonds, money market instruments, accounts receivable, and marketable securities are all current assets.
Fixed assets are long-term assets that cannot be readily converted into cash, meaning that they are less liquid. The majority of fixed assets are property owned by the organization. Unlike current assets, there isn’t necessarily an expectation that a fixed asset will be sold, as fixed assets are usually employed to produce more of a product. Because such property is subject to depreciation, when fixed assets are converted into cash, they can often lose value. Fixed assets include real estate, leasehold improvements, physical plants and facilities, equipment (such as office equipment and heavy operating machinery), fixtures, vehicles, and other items that can be reasonably assumed to last for several years.
Assets provide the means of production and the cash flow to keep business operations running smoothly. Companies add assets whenever they expect the asset will generate more revenue in the future. For that reason, many use leverage in order to assume some risk now for a great reward down the line.
Having assets also helps individuals manage their finances, either by converting liquid assets to cash or by using the asset as collateral, such as with a mortgage.
Mortgages are a kind of secured loan backed by an asset, the borrower’s house. Get the more competitive rate on a home loan using Bankrate’s mortgage calculators.
Candy runs a lemonade stand outside her parents’ house. She has the following fixed assets: the stand itself, her pitcher, a juicer, and a collection jar for cash and tips. Her current assets are all the ingredients she has on hand, like a pile of lemons, water and ice, and sugar. She quickly cooks up 15 cups of lemonade to sell to people, increasing her current assets by 15 units of inventory. Candy’s parents invest $5 into the lemonade stand, giving her liquid assets that she can use to buy a second juicer and double her output. She borrows an additional $5 from her parents, using leverage to purchase another tangible asset: a fixed sign on the other end of the block directing passersby to the stand.