Assets are a key part of a company’s financial position and can significantly impact whether they can generate income for multiple years. Since many different items can be classified as an asset, below are various types of assets that a person or corporation can have that may financially benefit them in the future.
Asset Definition
By definition, an asset is something that is owned by a person or corporation. For example, corporation-owned items such as cars, buildings, and other pieces of land are considered business assets. Asset examples for individuals can include cash, checking and savings accounts, and real estate.
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How Assets are Placed on a Balance Sheet
On the balance sheet, assets are written typically based on descending liquidity. The quicker an asset can be converted into cash, the higher it is listed under the statement of financial position. Since classifying assets based on liquidity is important, they are listed under either current or fixed on the balance sheet.
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Current Assets
The first type of asset is called current assets. Current assets are assets that a company owns which will be used up or converted into cash within the year. For example, one of the most common types of current assets a company has is called “accounts receivable.” Accounts receivable refers to the amount the company expects to collect from clients who have not yet paid for the business’s services.
Prepaid Expenses
The next type of current asset is prepaid expenses. Prepaid expenses are typical current assets businesses have; since many deals involve the purchase of rent and insurance in advance. Therefore, since these companies have not yet utilized these services, they disclose the prepaid expenses under the current assets.
Inventory
The final current asset is inventory. If a company is in the reselling business, such as Walmart or Target, then these companies will have a line item disclosing their inventory. Inventory consists of the items the company purchases or produces that will be sold in their stores later.
Cash and Cash Equivalents
Cash and cash equivalents are usually the first item listed on a balance sheet of a public or private company. This line item showcases the amount of cash a company has on hand. The cash equivalents relate to short-term, marketable securities such as treasury bills or bonds, which are readily convertible to cash.
Similarly, a person can also have cash and cash equivalents, typically the money they have in their bank account, plus any other investments that can be sold quickly to obtain cash.
Equity Assets
Equity assets are equal to the difference between total assets and total liabilities. On the balance sheet, the value of the total assets must equal the total liabilities and equity. Equity assets consist of common and preferred stock, which is how much money the company receives from issuing shares. These equity accounts show how much of the company is owned by shareholders, and their cumulative value is important in calculating key financial ratios.
Fixed Income Assets
Fixed-income assets are a particular type of marketable securities which pay a set dividend. The main example of fixed-income securities is government bonds. Government bonds are backed by the federal government and are considered risk-free assets because they virtually guarantee a profit. Bondholders will receive annual or semi-annual interest payments, and their principal investment once the bonds mature.
Therefore, since the bondholder will receive a fixed amount of income annually or semi-annually, they are classified as fixed-income assets. On the balance sheet, if the company owns fixed-income assets, the company will report them under “Cash and Cash Equivalents.”
Fixed Assets
The second type of asset which many individuals and corporations have are fixed assets. Sometimes, companies may not have the term “fixed assets” on their statement of financial position because the term refers to the classification of assets. Fixed assets are assets that the company has to generate revenue.
These assets are usually held for more than one year and are sometimes called long-term assets. Some examples of fixed assets include the equipment the company owns to create an economic benefit, the buildings their operations run in, and vehicles. Fixed assets are made up of tangible and intangible assets, and there is a key difference between the two.
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Liquid Assets
Liquid assets can quickly be converted into cash within a short period of time. Some common examples of liquid assets include cash, cash equivalents, accounts receivable, and prepaid expenses. Since balance sheet assets are listed based on descending solvency, liquid assets are among the first listed items on the balance sheet since they can be quickly converted into cash.
Tangible Assets
Tangible assets are items a business owns that have physical substance. Some tangible assets include buildings, cars, and machinery/equipment used in everyday business operations. Most assets recorded on the balance sheet have substance, but there are a couple of exceptions called intangible assets.
Intangible Assets
Intangible assets are uncommon assets not typically seen on many financial statements. However, although its presence is infrequent, it does not mean they do not matter. Intangible assets refer to certain assets a company may have that lack physical existence/substance.
For example, Nike’s infamous swoosh or their slogan “Just Do It” are both trademarked and copyrighted, so other companies do not have the opportunity to knock off these iconic symbols of their company. As a result, to prevent companies from stealing their intellectual property, the company had to get lawyers to file for these key documents.
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Benefits of a Balance Sheet
Regardless of whether it is a personal or corporate balance sheet, the main benefit of this financial statement is determining how well a company is performing. Being provided a list of the different types and amounts of assets and liabilities a person/company can have, one can determine if certain financial ramifications need to be made to improve financially.
The Money Wrap-Up
Assets play a significant role in determining the outcome of one’s financial situation. The more assets you have, the easier it is to increase your income, which will ultimately help you achieve financial independence. As a result, it is important to know how assets are classified, so you are familiar with them when reading your personal or business financial statements.
Disclaimer: The financial information discussed in this article should NOT be considered financial advice. Conduct your own research and/or consult with a financial advisor. CapWay is NOT liable for any losses based on the above information.
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