Assets in common language means anything that we own e.g. your house, your car, your office, the furniture in your house as well as office ,the cash balance you have in your hand as well as in bank, the jewellary etc are all your assets. However
in accounting we have some broader meaning of the term assets. In accounting, assets are anything which has got some economic value and which is owned by the business entity. Some examples of assets are cash in hand, bank balance, investments, stock, land, building, plant, machinery, goodwill, debtors, prepaid expenses etc
Classification of assets:
Assets can be classified in to different categories on two basis
1. On the basis of their convertability into cash:
On the basis of how easily assets can be converted into cash, assets can be classified as current assets and fixed assets.
2. On the basis of their physical existence:
On the basis of their physical existence, assets can be classified into tangible assets and intangible assets.
1. Current assets vs. fixed assets
Some of the assets that the company owns are liquid in nature i.e. they can easily be converted ito cash. e.g. bank balance, debtors, stock, marketable investments are some of the assets which can be turned into cash easily when required. These assets are called current assets or liquid assets. The more easily an asset is convertible into cash the more liquid it is. Can you guess which is the most liquid asset for a business?
Yes, it is cash itself. Other examples of current assets are Bank balance, debtors, stock (finished as well as semi finished), marketable securities, prepaid expenses, accrued incomes etc. Current assets are important for working of a business unit because these assets provide the cash for the day to day working of the business. However unnecessary investment in current assets should be avoided as it results in ideal funds which could be invested elsewhere profitably.
Fixed assets are those assets which are held in the business for a long time say for many years e.g. land and building, plant and machinery, furniture,fixtures, office equipments, vehicles etc. These assets give their benefits for many years and hence are very important for a business. In almost any business a lot of money is invested in fixed assets.So these are among the most important assets of the business. For small business owners fixed assets are even more important because lenders or financial institutions examine the fixed assets of the business more closely while making lending decisions.
Fixed assets are also known as hard assets, non current assets or long term assets. These assets have a life expectancy of many years. But these assets lose thier value with the passage of time (except real estate). This loss in the value of fixed assets is called depreciation.
Since fixed assets involves major investment of the funds of the business and funds are blocked for a long time in these assets, care should be taken while investing in these assets. Any wrong decision on the investment in non-required fixed assets can affect the operating efficiency of the business.
2. Tangible vs. intangible assets
Some of the assets of the business are such which you can touch, see and feel e.g. Land, machinery, furniture are such assets which can be seen, touched and felt. These assets are called tangible assets. Tangible assets have physical existence. Some of the examples of tangible assets are cash,inventories, debtors,securities, land, building, machinery, furniture, equipments, vehicles etc.
In business its not necessary that all assets must have a physical existence. Some assets are such which can not be touched, seen or felt but still they have an economic value. The example of such assets are Goodwill, patents, trademarks, brand value, human intelligence. These assets are called intangible assets. These assets just like tangible assets can be sold and bought in the market and these appear on the balance sheet of the company together with other assets.