Updated July 19, 2023
Definition of Assets
An Asset forms a very key part of a business organization which could be defined as ‘the economic resources held by an entity due to its past activities through which entity will have future economic benefits as well as future cash flow in the long term run of the business in the future i.e., current assets, non-current assets, tangible assets, intangible assets, operating assets, non-operating assets.
Explanation
As the assets forms major part of an entity, they include many number of assets which could be bifurcated into different categories as per different natures of the asset. Majorly the assets could be bifurcated as per three natures or behaviours, namely;
1. As Per the Convertibility
- Current Assets and;
- Non-Current Assets
2. As Per the Physical Existence
- Tangible Assets and;
- Intangible Assets
3. As Per the Purpose or Usage
- Operating Assets
- Non-operating Assets
Types of Assets
As the short summary of the types of assets have been mentioned above, let’s understand the types of assets as well as the different type of natures of assets.
1. As Per the Convertibility
This bifurcation is done as per the terms or periods required for the convertibility of assets into liquid assets or Cash & Cash equivalents which could be either of the two:
Current Assets
Current Assets are the assets that are easily convertible into liquid assets or cash & cash equivalents. In terms of period, the current assets are the assets, which on requirement could be converted into liquid assets within a period of a year or 12 months. Examples of such assets are short-term deposits, inventories, marketable securities, prepaid expenses, Trade or Accounts Receivables, etc.
Non-Current Assets
Non-Current Assets are also known as Long term Assets which are not easily convertible into liquid assets as compare to the current assets. In terms of the period of conversion, the non-current assets usually take more than a year for conversion into liquid assets and are productive for business for more than a year. Examples of such assets are fixed assets like land, Plant & Machinery, Buildings, vehicles & Trademarks etc.
2. As Per the Physical Existence
This Bifurcation is done as per the physical existence of the assets as if the assets physically exist or the asset body physically exist or not and as per nature, the assets could be bifurcated into two parts:
Tangible Assets
Tangible assets are the assets that physical exist and they can be seen, felt, and touched by us and through which the business entity generate future economic profits and generate cash flows. Examples of such assets are Fixed Assets like plant & Machinery, lands, buildings, vehicles, furniture, etc. All of the fixed assets fall under the category of tangible assets.
Intangible Assets
Intangible assets are basically the assets whose physical form does not exist and could not be touched or felt by us but are essential assets to the business entity as the entity generates cash flow through them and as well as expected to derive future cash flows as well as economic benefits from them.
3. As Per the Purpose or Usage
This Bifurcation is done as per the actual usage of the asset i.e., the assets which are used on daily basis and are economically responsible for cash inflows or the assets which are kept or collected & are not used on daily basis but would be converted or benefited for some specific purpose at future date. Such types of assets could be categorized in two:
Operating Assets
Operating Assets are the assets, which are kept and used on a daily basis in the business for daily business operations. Such assets are part of every necessary operation of the business and some of the examples are plant & machinery, inventories, Buildings, equipment, trademarks, cash & cash equivalents, etc. These assets are used to derive cash flow & business operations through the basic & common business activities of the entity.
Non-Operating Assets
Non-operating assets are a little different from the operating assets. As operating assets are used in daily business operations and the revenue is generated on daily basis but non-operating assets are the assets, which are store, accumulated, or hold onto by the entity to generate cash flow in the future. These assets are not directly related to business activities or practices but are another source of revenue for the entity. Examples of such assets could be some type of short-term investments or Fixed Deposits. As these assets are not related to business activities or operation but through these financial assets, organizations generate revenues. Another example could be ‘Assets held for sale’. As sometimes, the organization ceases some activities of the business operations and the assets directly related to those activities become not needed and are hold onto by the entity to sale those assets and get some values for it. For the period, those assets are held by the entity just for the purpose of selling them, those assets qualified as non-operating assets.
Conclusion – Types of Assets
The bifurcation or classification of the assets into different categories as per the nature of the assets turns out to be very useful for the organization. As the qualification of assets into current assets and non-current assets helps the entity to identify the net working capital of the entity as well as helps to maintain the liquidity ration within the organization. As all the assets are economic to the business and are a source of generating revenues for the organization, the classification of assets as per usage into operating & non-operating assets helps the industry to evaluate the percentage of income generated through the revenue from the operation of the business and the revenues generated through other activities. These qualifications are used in the financial statements of the companies, which provide a clear financial position of the entity and the clear evaluation of the assets, and the types of assets hold onto by the entity. It becomes easy and very simple for the user of financial statement to identify and assess the position of assets held by the entity.
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