What are assets?
Assets are resources owned by a company that generate future economic benefits. Future economic benefits include an increase in cash inflow or a reduction in cash outflow. Some common examples are:
|Example of assets||Examples of economic benefits the asset generate|
|Land and Buildings||Can be used to set up offices or stores in the buildings. This helps to generate revenue for the business|
|Plant and Machinery||Can be used to produce inventory that can be sold|
|Motor Vehicles||Can be used in delivering raw materials and/or inventory|
|Inventory (Goods that are acquired and/or produced for the purpose of resale)||Inventory can be sold to generate sales revenue (see note for more)|
|Accounts receivable (Amounts your company is entitled to receive but have not. This happens when some customers bought items from your business but have not paid yet.)||Having an accounts receivable means your company is entitled to a future payment from the customers. This entitlement is in itself an economic benefit.|
|Bank/ Cash (“Bank” simply means money in the bank account)||With “bank” and cash, your company can acquire other assets that generate more economic benefits|
The above are just examples; they are not an exhaustive list.
Notice how the assets are categorized: the items in red are non-current assets while items in blue are current assets.
Non-current assets are resources held by a firm that is intended for use in operations and are not expected to be consumed or turned into cash within a year. For example, a business buys a machine for its production rather than for simply buying and reselling it.
Current assets, on the other hand, include cash and other assets that are intended to be consumed or converted cash in an accounting year. For instance, a business acquires inventory simply because it wants to resell it at a higher price.
More on inventory:
Consider this example: your business buys 10 chairs in bulk for $200 in total ($20 each) and resell them for $500. Cha-ching! Your business just made a $300 profit. That $200 purchase will be considered an expense; the $500 from sales a revenue.
What does this have to do with “inventory” then? Well imagine this time you only manage to sell 7 of the chairs by the end of the year – the other 3 are still sitting in the warehouse (pun not intended). The $60 (3 times $20 each) will not be considered an expense at the moment. Instead, it is classified as “inventory” under the “assets” category in the meantime.
“Inventories” are assets because they (in our case, the chairs) can be sold in the future to generate sales revenue, an economic benefit.
That $60 will be reclassified from “inventories” to “expenses” when the chairs are sold in the future. They are no longer assets as the business cannot generate further revenue from items that have already been sold.
So now, you have (hopefully) developed an understanding of the term “assets” in accounting. Next, we will look at the question of where does a business get its assets from.
Horngren, C., Sundem, G., Elliott, J., & Philbrick, D. (2014). Accounting: The Language of Business. In Introduction to Financial Accounting (Eleventh ed., p. 9, 11).