A financially sound organization would have more assets than liabilities and while this means good financial health, the opposite means poor financial health of the organization. The balance sheet of the organization enlists all the assets owned by that organization.
Following are the 7 Types of Assets in an Organization :
For every type of asset, there are three aspects around which the type confirms: Ownership, Economic Value, and Resource. Who is the owner of the asset who can decide to convert the asset into cash if needed, what is the economic value of that asset at which it can be exchanged or sold and what resource does it serve and generate benefits for future. These three aspects determine all the categories of the assets.
1) Tangible Types of Assets
The assets which can be felt, seen and touched are called tangible assets. These assets have a physical substance and an economic value. An asset such as currencies, cash, buildings, real estate, vehicles etc. are tangible assets. A common practice is to apply depreciation to the tangible assets which have a lifespan of more than one year.
2) Intangible Types of Assets
Unlike tangible assets, intangible assets lack a physical substance and are very difficult to evaluate. examples of intangible assets would include patents, copyrights, Goodwill, trademarks and trade names. The lack of physical presence in case of intangible assets sometimes creates them hard to define and measure.
A company’s research and development department are also considered as an intangible asset. Research and development department is concerned with researching new theories, hypothesis, and products for the organization. The output of research and development will provide a competitive edge for the organization and bring new products into the market and hence research and development department is considered as an asset.
While on the other hand intangible assets like goodwill which is created from customers, trademarks which helps in identifying the products of the company etc. are equally crucial. General accounting standards offer few examples of how should the intangible assets be accounted for in the financial statements. Under US GAAP, intangible assets are further classified into Internal intangibles vs. Purchased intangibles and limited life vs unlimited life intangibles.
3) Current Types of Assets
The assets which can easily be converted into cash are called current assets. These include stock, inventory, fixed deposits, bank balance, prepaid expenses etc. Current assets have a relatively shorter life as compared to fixed assets and sometimes current assets are also termed as liquid assets.
The advantage of current assets is that an organization can liquify them at will and they provide cash to run the business. In terms of emergency, current assets are the first to be sold out. The ability of the firm to convert quick cash or current assets to nullify its liabilities is called quick ratio or acid-test ratio.
4) Fixed Types of Assets
Like the name explains, fixed assets are fixed in nature and they cannot be easily converted into cash. They require a lot of time for conversion into cash however compared to current assets fixed assets are more profitable. Building plant machinery is some of the examples of fixed assets. Fixed assets are never sold by the company unless at the time of emergency. At times the organization may think of replacing the fixed assets but the survival of the organization is very difficult without fixed assets. Fixed assets are also referred to as PPE which is Plant, Property, and Equipment. Compared to current assets these are purchase for a very long-term and then sure generating profits for business. Fixed assets are also defined as the assets which cannot be sold to the end customer directly. Fixed assets are of two types: Freehold fixed assets and Leasehold fixed assets.
- Freehold Fixed assets are the ones which are purchased with the legal right of ownership. This includes land when it is owned by the owner.
- Leasehold Fixed assets are the ones which are leased for a pre-decided period of time. The ownership of the leasehold fixed assets lies with the owner while the usage rights lie with the borrower. Post completion of a fixed period, the owner can decide whether or not to continue leasing the property or asset to the borrower.
5) Operating Types of Assets
Operating assets are all the assets that are necessary for everyday transactions of business. In other words, the assets that the company utilizes for the production of service or product are called operating assets. They include cash, bank balance, inventory, equipment etc. Operating assets are very useful for running of the business and without operating assets your organization cannot produce the output.
6) Non-operating Types of assets
the assets which are not used on a regular basis for everyday operations of the business are termed as non-operating assets. However, these assets are very crucial for the future needs of the business and hence they are termed as non-operational. an example would include the purchase of a real estate by the organization for appreciation but not for everyday operations and production. Short-term investments, marketable securities, vacant land are examples of non-operating assets.
7) Financial Types of Assets
A financial asset is the one which has a value on its own. A financial asset is used to convert the asset into liquid cash. It can be anything from cash itself to stocks, bonds, etc. Short-term and long-term investments are also classified as financial assets. All fixed assets, current and operating assets fall under financial assets. Intangible assets do not come under this category.
Importance of classifying different Types of Assets
- For the proper flow of money, to understand the cash flow and expenses generated, it is very crucial that assets are classified since the classification gives a better understanding of which head incurs more expenses and generates more profits.
- Classifying the assets into tangible and intangible, operating and non-operating and other types helps the firm to determine its solvency and risk.
- Every asset serves a specific purpose. For example, the fixed asset cannot be sold in the times of financial crisis but current assets can be sold. Having knowledge of this essential for smooth running of the business and it also helps in making financial decisions.