Types of Assets in Accounting
Assets are the resources owned by individuals or companies or governments that are expected to generate future cash flows over a long period. There are broadly three types of asset distribution – 1) based on Convertiblility (Current and Non-current Assets), 2) Physical Existence (Tangible and Intangible Assets), and 3) Usage (Operating and Non-Operating Assets).
Type of Assets based on Convertibility
Classification of assetsClassification Of AssetsAsset classification is a systematic process of assigning the assets to their respective class or group. Such grouping of the assets is done based on the common characteristics possessed by them. Like current assets and fixed assets are categorized as per the duration the company holds these 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 assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc., is the short term assets, which easily get converted into cash by means of sales or consumption in normal business operations within one year of the time interval. List of current assets includes:
- Cash & cash equivalents
- Account receivablesAccount ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year.
- Marketable SecuritiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company's balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.
- Prepaid ExpensesPrepaid ExpensesPrepaid expenses are expenses for which the company paid in advance in an accounting period but which were not used in the same accounting period and have yet to be recorded in the company's books of accounts.
#2 – Noncurrent Assets
This type of accounting asset is long term assets (or Fixed AssetsOr Fixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.) that are not meant to be sold or consumed and will benefit the company for several years in the future. I.e., these assets will serve the business for more than a period of one year. Basic noncurrent assets include:
- Tangible Fixed AssetsTangible Fixed AssetsAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment. (like Property, Plant and Machinery (PP&E))
- Other Tangible Assets (like long term investments)
- Intangible AssetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. (like patents, copyrights, and Goodwill)
Type of Assets based on 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 assetsNoncurrent AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark. like property, plant, equipment, etc.
#2 – Intangible Assets
Assets that are not physically existed but contribute 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 based on Usage
Classification of assets based on usage i.e., either assets are used in day to day business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation. or assets, are accumulated for some specific purpose in the future.
#1 – Operating Assets
Assets that are required in the daily operations of a business are the operating assets. This type of accounting asset 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 sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. 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 article 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.