An asset is an item that is invested in with the intention of gaining future benefits from it. An asset can be any item that holds monetary value. Any individual or organisation can own an asset that promises them a future financial benefit or a stream of income.
Assets can be tangible or intangible. For instance, land is an asset as it can be loaned out in exchange for rent. Similarly, a patent, which is intangible, can also be considered as an asset as it provides monetary value to the owner of the patent.
All assets hold three fundamental properties that set them apart from any other type of holdings or investments by firms and individuals. These include:
Assets can be divided into various types based on different categorisations. Broadly, assets can be divided into the following types:
While other intangible assets can be used for profit generation in the future, simply by selling them, for instance, a company might sell the intellectual property rights of one of their products to gain profits from them.
Based on how easily the assets can be converted into cash, they can be further categorised into different types:
These assets help finance the day to day operations of a business and thus, are easily convertible into liquid money.
Assets can be categorised based on their usage into Operating and Non-Operating Assets. Operating assets are the assets used daily, while Non-Operating Assets are not used as frequently but are still crucial for a business. Operating assets would include cash, machinery, equipment patents, etc. In comparison, non-operating assets would consist of short-term investments or land or real estate that might come in usage later and do not have an immediate requirement.
Assets may also be categorised based on their physical existence into tangible and non-tangible assets. Tangible assets are physical assets like land, building machinery, inventory, while intangible assets may include various other aspects of a business that do not have a physical existence like goodwill, copyrights, trademarks, licenses and permits, intellectual property, etc.
The value of an asset held by an individual or an organisation at a time may not be equal to what it was at the time when it was bought. The value of an asset is affected by factors like depreciation and fair value.
In case of a physical asset, depreciation is the wear and tear that an asset undergoes with the course of time. However, depreciation can be generalised as the process of spreading the cost of an asset over time. It decreases the value of an asset or an item over time.
Fair value refers to the market value of an asset at a point of time. If an asset of a company was to be sold in the market five years after it was bought, then the fair value of the asset refers to the amount that it would sell for at that point. This value is derived through the process of fair market value analysis, where prices of other assets are compared to the asset in question. Some professionals are skilled at calculating fair value.