Types of Assets in Accounting
Assets provide structure to an entity and work as vital organs to keep it fully functioned. Assets are the resources owned by individuals or companies or governments that are expected to generate future cash flows over a long period of time. Assets have economic value and can be exchanged or sold i.e. Assets are bought by the entities in order to increase their income or to help a company in their overall operations. Assets can be distributed into various types based on some classification criteria and the nature of assets. Broadly accounting assets can be classified into three types as shown in the following figure.
Type of accounting assets based on:
Type of Assets on the Basis of Convertibility
Classification of assets based on how easily an asset gets converted into cash. Convertible assets are further classified as:
#1 – Current Assets
This type of accounting assets i.e. Current assets are the short term assets, which easily get converted into cash by means of sales or consumption in normal business operations within a one year period of time interval. List of current assets includes:
#2 – Noncurrent Assets
This type of accounting assets are the long term assets (or Fixed Assets) which are not meant to be sold or consumed and will benefit the company for a number of years in future i.e. these assets will serve the business for more than a period of one year. Basic noncurrent assets include:
- Tangible Fixed Assets (like Property, Plant and Machinery (PP&E))
- Other Tangible Assets (like long term investments)
- Intangible Assets (like patents, copyrights, and Goodwill)
Type of Assets on the Basis of Physical Existence
Classification of assets based on the existence of assets in physical form or it lacks physical substance.
#1 – Tangible Assets
Assets with physical existence are tangible assets. These are considered as measurable assets because its value can be easily identified based on their current condition and expected future benefits. Tangible assets include both current assets like cash, inventory, marketable securities, etc and noncurrent assets like property, plant, equipment, etc.
#2 – Intangible Assets
Assets which are not physically existed but contributes much towards general operations and survival of the entity and thus are often considered being the intellectual properties. Due to their nonphysical or intellectual existence, it becomes very difficult to assign them some value. E.g. Goodwill, Patents, Trademarks, copyrights, etc.
Type of Assets on the Basis of Usage
Classification of assets based on usage i.e. either assets are used in day to day business operations or assets are accumulated for some specific purpose in the future.
#1 – Operating Assets
Assets which are required in the daily operations of a business are the operating assets. This type of accounting assets is used in every necessary business operations i.e. from production to sales. E.g. Cash, inventory, plant, machinery, etc.
#2 – Non-Operating Assets
This type of accounting assets are not meant to be applied in day to day business operations but are accumulated as future investments or for contingent situations. I.e. these assets generate income but have negligible participation in the basic functionality of a business. E.g. Land purchased to develop a new building for head-office, or shares purchased considering future appreciation in prices.
Understanding the type of accounting assets helps in placing the correct assets in their respective asset blocks. The knowledge helps in creating an accurate positional statement for the company. The balance sheet is the most important financial document for an investor where assets are divided into various blocks (like current or noncurrent, tangible or intangible) for its easy understanding and simplified research. E.g. an investor can easily perform various ratio-analysis if assets are properly categorized.
To get a clear picture of various types of assets and their classification criteria, refer the following table:
This has been a guide to Assets in Accounting Types. Here we discuss the classification of assets types including Current assets, Non-Current assets, Tangible Assets, Intangible Assets etc. You may learn more about Accounting from the following articles –