Last week, we discussed the topic of liabilities—and the type of liabilities that could affect your small business. This week, let’s explore the topic of assets, including the three properties that make up an asset, three ways to classify an asset, and the classifications “explained”, with examples! According to the International Financial Reporting Standards (IFRS): “An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise” To give you a general idea of assets, the types that exist are: Current Fixed Physical Intangible Operating Non-operating An Asset Has Three Defining Properties These include: Resource: Assets are resources that can be used to generate future economic benefits. Ownership: Assets embody ownership that can eventually be turned into cash and cash equivalents. Economic Value: Assets have economic value and can be exchanged or sold. An Asset Has Three Classifications Generally, assets are classified by their: Physical Existence: Based on an asset’s physical existence Convertibility: Based on how easy it is to convert assets into cash. Usage: Based on an asset’s business operation usage. Classification of Assets: Explained Assets can be categorized into three pillars: physical existence, convertibility, and usage. 1) Physical Existence If assets are classified based on their physical existence, then they are either tangible assets or intangible assets. Tangible Assets These are assets that we can touch, feel, and see (hence the “physical” aspect!) To better understand what tangible assets are, examples include: Cash Land Building Equipment Machinery Office Supplies Stock, and Marketable securities Intangible Assets On the other hand, intangible assets are those we can’t touch, feel, or see (hence they do not have a physical existence!) Examples include: Corporate intellectual property Brand Copyrights Trademarks Trade secrets Permits Goodwill Patents 2) Convertibility If assets are classified based on their convertibility into cash, then they can be classified as either current assets or fixed assets. Current Assets Current assets can easily be converted into cash and cash equivalents (typically within one year). Another term for current assets are liquid assets. Examples include: Cash Cash equivalents Short-term deposits Office supplies Stock Marketable securities Fixed Assets or Non-Current Assets Fixed assets, also known as non-current assets, these are assets that cannot be easily and readily converted into cash and cash equivalents. Other terms of these assets are long-term assets or hard assets. Some examples include: Land Building Machinery Equipment Patents Trademarks 3) Usage If assets are classified based on their operational usage, then they are either operating assets or non-operating assets. Operating Assets Operating assets have one purpose: to generate value. These are assets that are required in the daily operation of a business. Examples include: Cash Stock Building Machinery Equipment Patents Goodwill Copyrights Non-Operating Assets Non-operating assets on the other hand can generate revenue; however they are not required for daily business operations. Examples include: Short-term investments Marketable securities Interest income from a fixed deposit Vacant land Why is Asset Classification So Important? The ability to classify assets is integral to a business, how it operates, and its level of success. For instance, in a high-risk industry, understanding which assets are tangible and intangible will help you determine the solvency and risk of your business. Understanding which assets are current vs. fixed is critical to identify the net working capital of your business, which potential investors and stakeholders may ask for. Finally, determining which assets are operating vs. non-operating is important to understand the contribution of revenue from each asset. All three classifications are different but they serve one purpose: to help you understand how your business is operating financially, which subsequently affects decision-making and the overall actions that you’ll take to reach your “version” of success! Once you’ve got your finances in check, make sure you’re tracking your income, expenses, and other financial data within Kashoo! We’ll help you create insightful data that will make it even easier for you view the financial status of your business at-a-glance. We’ll even help you get ready for tax season!
