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Assets are economic resources that have exchange value, meaning you can buy, sell or trade them for other goods or services. An asset can be tangible or intangible and can hold, grow or lose value. Put another way: If you can sell something for money — even if it takes a long time — it’s probably an asset. Accordingly, an asset’s opposite is a liability.
Why are assets important?
You might as well ask why money is important. The simple answer is that assets are required for much of modern life. They are a measure of an individual’s or a business’s wealth. Plus, you need assets to qualify for secured loans — such as a mortgage — to pay for goods and services, to start a business and to save for retirement.
Among other things, assets represent half of the net worth equation. Knowing your net worth is helpful for setting long-term and short-term financial goals. And, financial planners often use your net worth for product and service recommendations. It’s an easy equation and you can calculate yours using the instructions outlined further along in this article.
For a company, you’ll find a list of assets reported on its balance sheet. For individuals, you have to tally your assets yourself. We cover what counts as an asset below.
Examples of assets
Here’s a rundown of some common assets. These categories and examples are not exhaustive, however. So if you’re confused, return to this quick test: An item is considered an asset if it holds value of some sort. Even shorter: if you can sell it, it’s an asset.
Personal assets can include cash or cash equivalents, financial securities, checking and savings accounts, brokerage accounts, certificates of deposit (CDs), houses and other real estate, motor vehicles, collectibles such as art, jewelry and gold, patents, copyrights and trademarks, life insurance policies, business interests, intellectual property and accumulated retirement benefits.
Companies may own various tangible and intangible assets that allow it to operate and generate income and profits. Examples of business assets include cash and cash equivalents, accounts receivable, marketable securities, trademarks, patents, product designs, distribution rights, buildings, land and mineral rights, equipment, inventory, software, computers, furniture and fixtures, a home, financial securities, loans held, jewelry, artwork, gold and silver, a checking account, motor vehicles, buildings, machinery and equipment.
Types of assets
While you can group assets into a number of different categories, the most common are tangible and intangible.
Tangible assets, as the name suggests, are physical items. Cash and cash equivalents, equipment, electronics, real estate and furniture, for instance. Think of all the items you own — they are your tangible assets.
Less obviously, stocks, bonds and CDs are also considered tangible because they used to be represented by physical certificates, and sometimes still are. With electronic banking, it can seem trickier to sort physical and non-physical assets, but once you understand what makes an asset intangible, you’ll see the differences between the two.
Intangible assets have long-term financial value to a business but no physical presence. Intellectual property is a prime example, including patents, copyrights, trademarks. Other examples include franchises, goodwill, brand equity, reputation, brand recognition, research and development (R&D), and licensing. Intangible assets are used to improve a company’s long-term worth.
Methods of asset valuation
When it comes to calculating asset value, there are a few approaches. Here are some common ones analysts use:
Value investors generally use this type of analysis to find whether a stock is undervalued or overvalued. To find a company’s financial worth using absolute valuation, analysts use a discounted cash flow analysis. This involves estimating future cash flows and then discounting them to present value to find the intrinsic worth of the firm. The net present value may change depending on the discount rate used.
In contrast, relative valuation models determine the value by observing market prices of similar assets. In other words, relative valuation compares similar stocks to assess value, while absolute valuation analyzes one company’s financials. Another example of relative valuation is real estate comps. Your home is compared to other nearby properties that were recently sold to help determine value.
Net asset value (NAV)
Another common calculation is net asset value (NAV). Mutual funds and ETFs use this to calculate fund share prices — the price you pay to trade shares in the fund. The formula is assets minus liabilities divided by total shares outstanding.
Net worth and net assets
If you’re looking to find your net worth, add up all your assets, including cash, real estate, jewelry and investments, then subtract any outstanding liabilities. Liabilities are your debts, such as student loans, auto loans, mortgages and credit card debt. Keep in mind some assets, such as furniture, cars and equipment, may depreciate over time, so you’ll need to update your net worth as your assets increase or decrease in value.
Businesses use the same formula — assets minus liabilities — to find their net worth. However, when totaling assets they also include the following: accounts receivable, inventory, office furniture and equipment, tools, machinery, and equipment, vehicles, prepaid insurance and any other asset that can easily be converted to cash and has a readily ascertainable value. Intangible assets are included as well. Think intellectual property, brand equity, company reputation and goodwill, copyright, trademarks, patents, franchises, licensing agreements, domain name, employment contracts, customer lists and client relationships.
What’s the difference between current assets and fixed assets?
Current assets are short-term assets used to keep a business running and are typically used up in less than one year. Cash and cash equivalents — liquid assets — are considered current assets, as is inventory.
Fixed assets, on the other hand, are long-term, physical assets. They have a useful life of more than one year and cannot be readily converted to cash. Examples include factories, equipment, vehicles, buildings and real estate. On a company balance sheet, you’ll see it listed as property, plant and equipment (PP&E). Tangible assets and capital investments are other ways of describing fixed assets. Lastly, fixed assets undergo depreciation while current assets are not depreciated.
Assets are a cornerstone of an individual’s net worth and a company’s net value. And knowing what counts as an asset is essential for accurate financial calculations and projections.