FAQs: Financial Assets Defined
What Is an Asset?
An asset is anything that an
organization owns, that has a value, and that can be
converted into cash. So, assets can include such things
as real estate, equipment, trademarks, stock, bonds,
bank deposits, and cash itself.
To illustrate this, let’s
take the example of Fred who has his own small printing
business. He owns the shop where he runs his business,
but his printing equipment is leased. So, the building
is an asset but the equipment is not.
Assets can be classified into
two major categories: “tangible” and “non tangible.”
What Is a Tangible Asset?
Tangible assets have a
physical existence and include such things as bank
balances, cash in hand, real estate, stock, a shop or
plant, business equipment, and automobiles. Physical
assets can be subdivided into “fixed” and “current”
assets.
Fixed assets are those items
that a business would be expected to retain or acquire
in order to facilitate the efficient running or
expansion of that business. So for example, if Fred were
to expand and buy another print shop, then it would
become a new fixed asset of his printing business.
Current assets are those that
can readily be converted into cash. Such assets include
stock, bank balances, and of course, cash. Using Fred’s
business as an example again, if his business continued
to grow, then he may decide to buy and hold larger
quantities of different types of paper and inks. This
increased volume of stock would be regarded as a current
asset of his business.
What Is an Intangible
Asset?
Intangible assets are those
which have no physical presence. So, assets such as
copyrights, brands, trademarks, franchises, goodwill,
and patents are all regarded as intangible. Also,
certain financial assets such as bonds, stocks, and
accounts receivable are considered intangible assets.
How Do Assets Reflect a
Company’s Financial Position?
A balance sheet is a
financial statement that shows a company’s total assets
and liabilities. An asset, as has been shown, has a
value—whereas a liability, in contrast, is a debt owed
by the company. The balance sheet is a crucial document
in terms of assessing the current financial position of
a business.
Assets are a valuable
commodity and help to secure the future of any business
by making a direct contribution to cash flow. Also, it
is the objective of any commercial business to
strengthen its balance sheet by possessing and acquiring
assets. A strengthened balance sheet enables customers
and potential investors to have confidence in a
business.
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