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Types of Assets

Classifying assets based on convertibility, physical existence and usage

What Are the Main Types of Assets?

An asset is a resource owned or controlled by an individual, corporation, or government with the expectation that it will generate future cash flows. Common types of assets include: current, non-current, physical, intangible, operating, and non-operating.  Correctly identifying and classifying the types of assets is critical to the survival of a company, specifically its solvency and associated risks.

The International Financial Reporting Standards (IFRS) Framework defines an asset as follows: “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.”

 

Types of Assets

 

Examples of assets include:

 

Properties of an Asset

There are three key properties of an asset:

  • Ownership: Assets represent ownership that can be eventually turned into cash and cash equivalents.
  • Economic Value: Assets have economic value and can be exchanged or sold.
  • Resource: Assets are resources that can be used to generate future economic benefits

 

Classification of Assets

Assets are generally classified in three ways:

  1. Convertibility: Classifying assets based on how easy it is to convert them into cash.
  2. Physical Existence: Classifying assets based on their physical existence.
  3. Usage: Classifying assets based on their business operation usage.

 

Types of Assets - Diagram and Breakdown

 

Classification of Assets: Convertibility

If assets are classified based on their convertibility into cash, assets are classified as either current assets or fixed assets.

 

1. Current Assets

Current assets are assets that can be easily converted into cash and cash equivalents (typically within a year). Current assets are also termed liquid assets and examples of such are:

  • Cash
  • Cash equivalents
  • Short-term deposits
  • Stock
  • Marketable securities
  • Office supplies

 

2. Fixed or Non-Current Assets

Non-current assets are assets that cannot be easily and readily converted into cash and cash equivalents. Non-current assets are also termed fixed assets, long-term assets, or hard assets. Examples of non-current or fixed assets include:

  • Land
  • Building
  • Machinery
  • Equipment
  • Patents
  • Trademarks

 

Classification of Assets: Physical Existence

If assets are classified based on their physical existence, assets are classified as either tangible assets or intangible assets.

 

1. Tangible Assets

Tangible assets are assets that have a physical existence (we can touch, feel, and see). Examples of tangible assets include:

  • Land
  • Building
  • Machinery
  • Equipment
  • Cash
  • Office supplies
  • Stock
  • Marketable securities

 

2. Intangible Assets

Intangible assets are assets that do not have a physical existence. Examples of intangible assets include:

  • Goodwill
  • Patents
  • Brand
  • Copyrights
  • Trademarks
  • Trade secrets
  • Permits
  • Corporate intellectual property

 

Classification of Assets: Usage

If assets are classified based on their operational usage, assets are classified as either operating assets or non-operating assets.

 

1. Operating Assets

Operating assets are assets that are required in the daily operation of a business. In other words, operating assets are used to generate revenue.  Examples of operating assets include:

  • Cash
  • Stock
  • Building
  • Machinery
  • Equipment
  • Patents
  • Copyrights
  • Goodwill

 

2. Non-Operating Assets:

Non-operating assets are assets that are not required for daily business operations but can still generate revenue. Examples of non-operating assets include:

  • Short-term investments
  • Marketable securities
  • Vacant land
  • Interest income from a fixed deposit

 

Importance of Asset Classification

Classifying assets is important to a business. For example, understanding which assets are current assets and which are fixed assets is important in understanding the net working capital of a company. In the scenario of a company in a high-risk industry, understanding which assets are tangible and intangible will help it determine its solvency and risk. Determining which assets are operating assets and which assets are non-operating assets is important to understanding the contribution of revenue from each asset. Therefore, knowing how to classify assets is integral to business success.

 

 

Related Readings

We hope you have enjoyed reading CFI’s guide to types of assets. Check out the following free resources for more information.

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