Your Complete Guide to Business Assets

Understand Deeply the Assets that Affect Your Business

Asset means anything of monetary value owned by an individual or business. 

A business asset is a resource that has an economic value for a company and which can be used in the current or future time period to generate revenues.

Examples of business assets are:

• Cash and cash equivalents
• Property, plant and equipment
• Inventory
• Investments
• Furniture and fixtures
• Patents, copyrights and trademarks

Properties of an Assets:

There are 3 key essential properties of a business asset:

• Ownership: Assets that carry ownership and can be eventually turned into cash and cash equivalents
• Economic Value: Assets that carry economic value & can be exchanged or sold
• Resource: These assets are basically those resources which can be used to generate future economic benefits

Classification of assets:

Business Assets can be classified into 3 categories:

1. Convertibility: Classifying assets based on how quickly they can be converted into cash.
2. Physical Existence: Classifying assets on the basis of their physical existence i.e. tangible or intangible.
3. Usage: Classifying assets on the basis of their business usage or purpose.

1. Convertibility:

Classifying assets based on how quickly they can be converted into cash i.e. short-term assets and long-term assets.

• Short-term Assets = Assets that you expect to sell or convert into cash, within 1 year.

- Cash

- Marketable securities – traded investments easily convertible to cash

- Trade accounts receivable (Debtors + Bills receivable)

- Prepaid insurance

- Inventory

• Long-term Assets = assets that will not get converted into cash in 1 year, and provide long-term value to your business.

- Fixed Assets: machinery, equipment, furniture, buildings, land, etc.

- Investments: similar to fixed assets; long-term investments, not to be sold within 1 year

- Franchise rights, patents, copyrights, trademarks, goodwill, etc.

2. Physical Existence:

On the basis of physical existence, assets can be classified as: tangible and intangible assets.

• Tangible Assets = assets which can be seen, touched i.e. having physical existence

- Land

- Building

- Machinery

- Cash

- Furniture & Fixtures

- Office equipment

• Intangible Assets = assets which can’t be seen i.e. which don’t have physical existence

- Goodwill

- Patents

- Brand

- Copyrights

- Trademarks

- Corporate intellectual property

3. Usage: 

On the basis of their usage, assets can be classified as operating and non-operating assets.

• Operating Assets = assets required in the daily operations of business i.e. assets which are used to generate revenue from company’s core business activities.

- Cash

- Stock

- Building

- Machinery & Equipment

- Patents & Copyrights

- Goodwill

• Non-operating Assets = assets which are not required in daily operations of business but still generate revenue for business.

- Short-term investments

- Marketable securities

- Vacant land

- Interest income from a fixed deposit

Why are these assets so important for any business?

Assets are important for any type of business due to the following reasons:

• Generating revenue
• Increasing the value of your business
• Facilitate the running of your business

You can transfer or sell assets, use them to lower your tax liability and in turn increase the efficiency of your business.

A good understanding of assets in business can help you achieve potential savings in your business.

For example: In some cases leasing an asset in a business, such as a machinery, can be way more cost-effective than buying one.

Intangible assets such as patents, copyrights and trademarks help in protecting your business against infringement. 

Learning about assets in business is a must for every entrepreneur. The efficient management of assets in a business is absolutely critical, as errors can lead to inefficient decision-making, incorrect tax reporting and inaccurate valuation of your business.