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In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset). [1] The balance sheet of a firm records the monetary [2] value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business. [1]


Assets can be grouped into two major classes: tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets. [3] Current assets include cash, inventory, accounts receivable, while fixed assets include land, buildings and equipment. [4] Intangible assets are non-physical resources and rights that have a value to the firm because they give the firm an advantage in the marketplace. Intangible assets include goodwill, intellectual property (such as copyrights, trademarks, patents, computer programs), [4] and financial assets, including financial investments, bonds, and companies' shares.

Formal definition

IFRS (International Financial Reporting Standards), the most widely used financial reporting system, defines: "An asset is a present economic resource controlled by the entity as a result of past events. [5] An economic resource is a right that has the potential to produce economic benefits." [6]

The definition under US GAAP (Generally Accepted Accounting Principles used in the United States of America): "An asset is a present right of an entity to an economic benefit." [7]


CON 8.4 [8] provides the following discussion of the nature of an asset:

E17: An asset has the following two essential characteristics:
(a) It is a present right
(b) The right is to an economic benefit.

E18:The combination of those two characteristics allows an entity to obtain the economic benefit and control others' access to the benefit. A present right of an entity to an economic benefit entitles the entity to the economic benefit and the ability to restrict others' access to the benefit to which the entity is entitled.

This accounting definition of assets includes items that are not owned by an enterprise, for example a leased building (Finance lease), but excludes employees because, while they have the capacity to generate economic benefits, an employer cannot control an employee.

In economics, an asset (economics) is any form in which wealth can be held.

There is a growing analytical interest in assets and asset forms in other social sciences too, especially in terms of how a variety of things (e.g., personality, personal data, ecosystems, etc.) can be turned into an asset. [9]


In the financial accounting sense of the term, it is not necessary to have title (a legally enforceable ownership right) to an asset. An asset may be recognized as long as the reporting entity controls the rights (economic resource) the asset represents.

The essential characteristic of control is the ability to benefit from the asset and prevent other entities from doing likewise. The IFRS conceptual framework explains (CF 4.20 [10] ): An entity controls an economic resource if it has the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it. Control includes the present ability to prevent other parties from directing the use of the economic resource and from obtaining the economic benefits that may flow from it. It follows that, if one party controls an economic resource, no other party controls that resource.

The accounting equation is the mathematical structure of the balance sheet. It relates assets, liabilities, and owner's equity:

Assets = Liabilities + Equity (in financial accounting, the term equity, not Capital, is used)
Liabilities = Assets − Equity
Equity = Assets − Liabilities

Assets are reported on the balance sheet. [11] On the balance sheet, additional sub-classifications are generally required by generally accepted accounting principles (GAAP), which vary from country to country. [12] Assets can be divided into current and non-current (a.k.a. fixed or long-lived). Current assets are generally subclassified as cash and cash equivalents, receivables, inventory, and accruals (such as pre-paid expenses). Non-current assets are generally subclassified as investments (financial instruments), property, plant and equipment, intangible assets (including goodwill) and other assets (such as resources or biological assets).

Current assets

Current assets are cash and others that are expected to be converted to cash or consumed either in a year or in the operating cycle (whichever is longer), without disturbing the normal operations of a business. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets:

  1. Cash and cash equivalents – it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts).
  2. Short-term investments – include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities)
  3. Receivables – usually reported as net of allowance for non-collectable accounts.
  4. Inventory – trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the "lower of cost or market" rule.
  5. Prepaid expenses – these are expenses paid in cash and recorded as assets before they are used or consumed (common examples are insurance or office supplies). See also adjusting entries.

Marketable securities: securities that can be converted into cash quickly at a reasonable price

The phrase net current assets (also called working capital ) is often used and refers to the total of current assets less the total of current liabilities.

Long-term investments

Often referred to simply as "investments". Long-term investments are to be held for many years and are not intended to be disposed of in the near future. This group usually consists of three types of investments :

  1. Investments in securities such as bonds, common stock, or long-term notes
  2. Investments in fixed assets not used in operations (e.g., land held for sale)
  3. Investments in special funds (e.g. sinking funds or pension funds).

Different forms of insurance may also be treated as long-term investments.

Fixed assets

Also referred to as PP&E (property, plant and equipment), these are purchased for continued and long-term use to earn profit in a business. This group includes land, buildings, machinery, furniture, tools, IT equipment (e.g., laptops), and certain wasting resources (e.g., timberland and minerals). They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land assets). Accumulated depreciation is shown in the face of the balance sheet or in the notes.

These are also called capital assets in management accounting.

Intangible assets

Intangible assets lack physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises & licenses, goodwill, trademarks, trade names, etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill.

Websites are treated differently in different countries and may fall under either tangible or intangible assets.

Tangible assets

Tangible assets are those that have a physical substance, such as currencies, buildings, real estate, vehicles, inventories, equipment, art collections, precious metals, rare-earth metals, Industrial metals, and crops. The physical health of tangible assets deteriorate over time. As a result, asset managers use deterioration modeling to predict the future conditions of assets. [13] Depreciation is applied to tangible assets when those assets have an anticipated lifespan of more than one year. This process of depreciation is used instead of allocating the entire expense to one year.[ citation needed ]

Tangible assets such as art, furniture, stamps, gold, wine, toys and books are recognized as an asset class in their own right. [14] Many high-net-worth individuals will seek to include these tangible assets as part of their overall asset portfolio. This has created a need for tangible asset managers.

Wasting Asset

A wasting asset is an asset that irreversibly declines in value over time. This could include vehicles and machinery, and in financial markets, options contracts that continually lose time value after purchase. Mines and quarries in use are wasting assets. [15] An asset classified as wasting may be treated differently for tax and other purposes than one that does not lose value; this may be accounted for by applying depreciation.

Comparison: current assets, liquid assets and absolute liquid assets

Current assetsLiquid assetsAbsolute liquid assets
Prepaid expenses
Bills receivableBills receivable
Cash in handCash in handCash in hand
Cash at bankCash at bankCash at bank
Accrued incomesAccrued incomesAccrued incomes
Loans and advances (short term)Loans and advances (short term)Loans and advances (short term)
Trade investments (short term)Trade investments (short term)Trade investments (short term)

See also

Related Research Articles

<span class="mw-page-title-main">International Financial Reporting Standards</span> Technical standard

International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's financial performance and position so that company financial statements are understandable and comparable across international boundaries. They are particularly relevant for companies with shares or securities publicly listed.

<span class="mw-page-title-main">Financial statement</span> Formal record of the financial activities and position of a business, person, or other entity

Financial statements are formal records of the financial activities and position of a business, person, or other entity.

<span class="mw-page-title-main">Balance sheet</span> Accounting financial summary

In financial accounting, a balance sheet is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as government or not-for-profit entity. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". It is the summary of each and every financial statement of an organization.

<span class="mw-page-title-main">Historical cost</span>

The historical cost of an asset at the time it is acquired or created is the value of the costs incurred in acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs. Historical cost accounting involves reporting assets and liabilities at their historical costs, which are not updated for changes in the items' values. Consequently, the amounts reported for these balance sheet items often differ from their current economic or market values.

In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be tangible book value.

An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture, or an automobile is often referred to as an expense. An expense is a cost that is "paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". Something that seems to cost little is "inexpensive". "Expenses of the table" are expenses for dining, refreshments, a feast, etc.

<span class="mw-page-title-main">Debits and credits</span> Sides of an account in double-entry bookeeping

Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value to that account, and a credit entry represents a transfer from the account. Each transaction transfers value from credited accounts to debited accounts. For example, a tenant who writes a rent cheque to a landlord would enter a credit for the bank account on which the cheque is drawn, and a debit in a rent expense account. Similarly, the landlord would enter a credit in the rent income account associated with the tenant and a debit for the bank account where the cheque is deposited.

<span class="mw-page-title-main">Income statement</span> Type of financial statement

An income statement or profit and loss account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.

<span class="mw-page-title-main">Valuation (finance)</span> Process of estimating what something is worth, used in the finance industry

In finance, valuation is the process of determining the value of a (potential) investment, asset, or security. Generally, there are three approaches taken, namely discounted cashflow valuation, relative valuation, and contingent claim valuation.

<span class="mw-page-title-main">Financial accounting</span> Field of accounting

Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.

<span class="mw-page-title-main">Cash flow statement</span> Financial statement

In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 is the International Accounting Standard that deals with cash flow statements.

<span class="mw-page-title-main">Fair value</span> Financial estimation of potential market price

In accounting, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. The derivation takes into account such objective factors as the costs associated with production or replacement, market conditions and matters of supply and demand. Subjective factors may also be considered such as the risk characteristics, the cost of and return on capital, and individually perceived utility.

<span class="mw-page-title-main">Fixed asset</span> Assets and property that cannot easily be converted into cash

A fixed asset, also known as long-lived assets or property, plant and equipment (PP&E), is a term used in accounting for assets and property that may not easily be converted into cash. Fixed assets are different from current assets, such as cash or bank accounts, because the latter are liquid assets. In most cases, only tangible assets are referred to as fixed.

<span class="mw-page-title-main">Chart of accounts</span> Accounting term

A chart of accounts (COA) is a list of financial accounts and reference numbers, grouped into categories, such as assets, liabilities, equity, revenue and expenses, and used for recording transactions in the organization's general ledger. Accounts may be associated with an identifier and a caption or header and are coded by account type. In computerized accounting systems with computable quantity accounting, the accounts can have a quantity measure definition. Account numbers may consist of numerical, alphabetic, or alpha-numeric characters, although in many computerized environments, like the SIE format, only numerical identifiers are allowed. The structure and headings of accounts should assist in consistent posting of transactions. Each nominal ledger account is unique, which allows its ledger to be located. The accounts are typically arranged in the order of the customary appearance of accounts in the financial statements: balance sheet accounts followed by profit and loss accounts.

<span class="mw-page-title-main">Amortization (accounting)</span> Accounting term for the spreading of payments over multiple periods

In accounting, amortization refers to expensing the acquisition cost minus the residual value of intangible assets in a systematic manner over their estimated "useful economic lives" so as to reflect their consumption, expiry, and obsolescence, or other decline in value as a result of use or the passage of time. The term amortization can also refer to the completion of that process, as in "the amortization of the tower was expected in 1734".

In financial accounting, a gain is when the market value of an asset exceeds the purchase price of that asset. The gain is unrealized until the asset is sold for cash, at which point it becomes a realized gain. This is an important distinction for tax purposes, as only realized gains are subject to tax. Gains are the result of circumstances, events, or transactions which affect the entity independent of revenue or owner investments. They are usually the result of holding gains, exchange transactions, events, or nonreciprocal transactions.

<span class="mw-page-title-main">Provision (accounting)</span> Account which records a present liability of an entity

In financial accounting under International Financial Reporting Standards (IFRS), a provision is an account that records a present liability of an entity. The recording of the liability in the entity's balance sheet is matched to an appropriate expense account on the entity's income statement. In U.S. Generally Accepted Accounting Principles, a provision is an expense. Thus, "Provision for Income Taxes" is an expense in U.S. GAAP but a liability in IFRS. 

A financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and participations in companies' share capital. Financial assets are usually more liquid than tangible assets, such as commodities or real estate.

<span class="mw-page-title-main">Liability (financial accounting)</span> Value that a financial entity owes

In financial accounting, a liability is a quantity of value that a financial entity owes. More technically, it is value that an entity is expected to deliver in the future to satisfy a present obligation arising from past events. The value delivered to settle a liability may be in the form of assets transferred or services performed.

The accounting profession in Luxembourg is structured around Ordre des Experts-Comptables (OEC) which serves as the main accounting body in the country. Luxembourg accounting standards are inspired from neighbouring France and Belgium. Similar to France, Luxembourg has set up a Commissions des Normes Comptables (CNC) which serves as an advisor to the Ministry for Justice in respect of accounting related matters, e.g. waivers for presenting consolidated accounts.


  1. 1 2 O'Sullivan, Arthur; Sheffrin, Steven M. (2021). Economics: Principles in Action. Washington, DC: Pearson Prentice Hall. p. 271. ISBN   978-0-13-063085-8.
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