What is an Asset?
An Asset is a resource with positive economic value that can either be sold for money if liquidated or be used to generate future monetary benefits.
- What is the definition of an asset?
- How is the assets section related to the liabilities and equity sections?
- What is the difference between a current and non-current asset?
- What are common examples of assets listed on balance sheets?
Assets refer to resources containing economic value and/or can be used to produce future benefits such as revenue for the company.
The assets section is one of the three components of the balance sheet and consists of line items representing positive economic benefits.
That accounting equation, also called the balance sheet equation, states that the assets will always be equal to the sum of the liabilities and equity.
- Total Assets = Total Liabilities + Total Shareholders’ Equity
This indicates that a company’s purchase of assets is financed with either:
- Liabilities — e.g. Accounts Payable, Accrued Expenses, Debt
- Shareholders’ Equity — e.g. Common Stock & APIC, Retained Earnings
Therefore, the assets side of the balance sheet represents the resources utilized by a company to generate revenue growth, whereas the liabilities and shareholders’ equity section are the funding sources — i.e. how the asset purchases were financed.
The assets section is comprised of items that are considered cash outflows (“uses”), the liabilities section is deemed cash inflows (“sources”).
Other assets are future cash inflows such as accounts receivable (A/R), which are the uncollected payments owed to the company from customers who paid on credit.
In the final type, there are long-term investments that can be used to derive monetary benefits, most notably fixed assets (i.e. PP&E).
Current and Non-Current Assets
The assets section of the balance sheet is separated into two components:
- Current Assets — Provides near-term benefits and/or can be liquidated within <12 months
- Non-Current Assets — Generates economic benefits with an estimated useful life >12 months
The assets are ordered on the basis of how quickly they can be liquidated, so “Cash & Equivalents” is the first line item listed on the current assets section.
Current assets are often called short-term assets since most are liquid and expected to be converted into cash within one fiscal year (i.e. twelve months).
Listed in the table below are examples of current assets found on the balance sheet.
|Cash & Cash Equivalents||
|Accounts Receivable (A/R)||
The non-current assets section includes the long-term investments of the company, whose potential benefits will not be realized in a single year.
Unlike current assets, non-current assets tend to be illiquid, which means these sorts of assets cannot easily be sold and converted into cash in the market.
But rather, non-current assets provide benefits for more than one year — thus, these long-term assets are typically capitalized and expensed on the income statement across their useful life assumption.
Tangible Assets and Intangible Assets
If an asset can be physically touched, it is classified as a “tangible” asset (e.g. PP&E, inventory).
But if the asset has no physical form and cannot be touched, it is considered to be an “intangible” asset (e.g. patents, branding, copyrights, customer lists).
The chart below lists examples of non-current assets on the balance sheet.
|Property, Plant & Equipment (PP&E)||
Operating vs Non-Operating Assets
There is one final distinction to be aware of — which is the classification between:
- Operating Assets — Essential to the core ongoing operations of a company
- Non-Operating Assets — Not essential to the day-to-day operations of a company, even if they produce income (e.g. financial assets).
A company’s operating assets have an integral role in the core financial performance. For example, the machinery and equipment owned by a manufacturing company would be deemed “operating” assets.
Conversely, if the manufacturing company invested some of its cash into short-term investments and marketable securities (i.e. public market stocks), such assets would be considered “non-operating” assets.
When conducting diligence on a company to arrive at an implied valuation, it is standard to evaluate just the performance of operating assets to isolate the company’s core operations.