asset

A company lists its assets on its balance sheet. Common asset categories include cash and cash equivalents; accounts receivable; inventory; prepaid expenses; and property and equipment. Although physical assets commonly come to mind when one thinks of assets, not all assets are tangible. Trademarks and patents are examples of intangible assets.

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Assets are presented on the balance sheet in order of their liquidity. Current assets, which are expected to be consumed or converted to cash within one year, are listed at the top. Cash, short-term investments and inventory are examples of current assets.

Long-term assets, or fixed assets, are expected to be consumed or converted to cash after one year's time, and they are listed on the balance sheet beneath current assets. Property (such as office space or buildings) and equipment are common long-term assets.

Investors buy assets with the understanding that assets should hold, or even better, grow their economic value over time. Common asset classes for individual investors include stocks, bonds, cash, foreign currencies, collectibles, precious metals, real estate and commodities. A collection of assets is called a "portfolio," and it is widely believed that an individual's portfolio should include assets from several different categories, a process called "asset allocation."

Capital assets usually include buildings, land, and major equipment. For example, Company XYZ might own a factory building on three acres of land, and the factory might be full of expensive equipment. The building, the land, and the equipment are all usually considered capital assets. Construction in progress, trademarks, patents, copyrights, vehicles, intellectual property, and art can also count.

Capital assets are recorded on the balance sheet at their historical cost, less any accumulated depreciation (or amortization in the case of intangible assets). So if Company XYZ paid $100,000 for a piece of equipment in the factory, it would record it as a $100,000 asset on its balance sheet.

But as the asset ages and becomes worth less, Company XYZ would increase the amount of accumulated depreciation associated with the equipment, so that the equipment's net book value reflects its reduced value.

Let’s assume XYZ Company intends to purchase an office building for $10 million. The building has a physical form, will last longer than a year and generates revenue, making it a fixed asset. When the company executes a legal purchase agreement with the seller, XYZ Company will have a place from which to conduct its business operations, and it will control what happens to the building from that point forward. Thus, XYZ Company acquired a $10 million asset and should reflect this fixed asset on its balance sheet.

According to the Financial Accounting Standards Board, all assets must provide reasonably estimable future economic benefits, must be controlled by the owner and must be the result of a prior event or transaction (such as a purchase).

Companies often record fixed assets on their balance sheets as property, plant and equipment. Like most assets, fixed assets usually lose value as they age, that is, they depreciate (amortization is the term used when referring to intangible assets). The rate at which a company chooses to depreciate its assets may result in a book value that differs from the current market value of the assets.

For example, goodwill, patents, trademarks and copyrights are intangible assets. None of these assets can be physically touched, but they can still have value.

The line item for intangible assets is found on the balance sheet. Though goodwill is considered an intangible asset, it's often listed as a separate line item.

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The formula for net assets is:

Net assets = Total assets - Total liabilities

Let's assume that Company XYZ's balance sheet reported $10,500,000 in assets and $5,000,000 in total liabilities. The company's net assets would be:

Net Assets = $10,500,000 - $5,000,000 = $5,500,000

It is important to note that most assets and liabilities on the balance sheet are listed at their book value rather than at their fair market value, and thus net assets doesn't necessarily represent the cash a company would have leftover if it sold all of its assets and paid all of its liabilities.

Let’s assume XYZ Company intends to purchase an office building for $10 million. The building has a physical form; it is a tangible asset. When the company executes a legal purchase agreement with the seller, XYZ Company will have a place from which to conduct its business operations, and it will control what happens to the building from that point forward. Thus, XYZ Company acquired a $10 million asset and should reflect this tangible asset on its balance sheet.

According to the Financial Accounting Standards Board, a tangible asset, like all assets, must provide reasonably estimable future economic benefits, must be controlled by the owner, and must be the result of a prior event or transaction (such as a purchase).

Companies often record tangible assets on their balance sheets as property, plant, and equipment. Like most assets, tangible assets usually lose value as they age, that is, they depreciate (amortization is the term used when referring to intangible assets). The rate at which a company chooses to depreciate its assets may result in a book value that differs from the current market value of the assets.

Assets have a useful life, usually based on the period of time that they have productive capacity. As the asset is used, it depreciates, eventually having little or no residual value.  During the period of depreciation, the asset is called a "wasting asset." For example, natural resources, such as gas and timber, are wasting assets that eventually are used and then have no remaining value.

In the capital markets, this can also be true. Some securities have a deadline for their purchase or sale. In some cases, the security loses value as it gets closer to the deadline. This is known as time decay.

For example, an option with a fixed end date for its execution may be worth less and less as the end date approaches. This is particularly relevant with regard to derivatives that are built on the movement of a particular underlying security. As the end date approaches and it becomes clearer to which direction the security will move, the risk is lower. Therefore, the market value of the derivative falls accordingly.