Accounting

Assets

Guide to Understanding Assets in Accounting

What are Assets?

Assets are resources with positive economic value that can either be sold for money if liquidated or be used to generate future monetary benefits.

Assets

Assets Definition in Accounting

The term “assets” in accounting refer to resources containing economic value 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.

The relationship between assets, liabilities, and shareholders’ equity is expressed by the fundamental accounting equation.

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.

Assets Formula

The formula for calculating assets is as follows.

Total Assets = Total Liabilities + Total Shareholders’ Equity

Conceptually, the formula indicates that a company’s purchase of assets is financed with either:

Liabilities — e.g. Accounts Payable, Accrued Expenses, Short-Term and Long-Term Debt
Shareholders’ Equity — e.g. Common Stock and APIC, Retained Earnings, Treasury Stock

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 comprises items that are considered cash outflows (“uses”), and the liabilities section is deemed cash inflows (“sources”).

Certain assets such as cash and cash equivalents (e.g. marketable securities, short-term investments) are a store of monetary value that can earn interest over time.

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 property, plant and equipment (PP&E).

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Types of Assets: Current vs. Non-Current Assets on Balance Sheet

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).

Generally, the current assets of a company are the working capital required by a company for its day-to-day operations (e.g. accounts receivable, inventory).

Listed in the table below are examples of current assets found on the balance sheet.

Current Assets	Description
Cash and Cash Equivalents	Cash and cash-like investments such as commercial paper, short-term government bonds, and marketable securities with high liquidity (i.e. can be converted into cash rather quickly).
Accounts Receivable (A/R)	A/R refers to uncollected payments owed to a company by its customers for products/services already earned (i.e. an “IOU” from the customer).
Inventory	Inventories consist of raw materials, unfinished goods (work-in-progress), and finished goods ready to be sold — as well as the direct costs associated with producing these goods.
Prepaid Expenses	Prepaid expenses refer to payments made in advance for goods/services expected to be received on a later date (e.g. upfront payment of utilities, insurance, and rent).

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.

Property, Plant & Equipment (PP&E) → Depreciation Expense
Intangible Assets → Amortization Expense

Tangible vs. Intangible Assets: What is the Difference?

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.

Non-Current Assets
Property, Plant & Equipment (PP&E)	PP&E consists of long-term fixed assets such as land, vehicles, buildings, machinery, and equipment — which are used to manufacture products or to help provide the company’s services to customers.
Intangible Assets	Intangible assets are non-physical assets like patents, trademarks, copyrights, and intellectual property (IP) — the values of intangibles are recorded post-acquisition.
Goodwill	Goodwill is an intangible asset created to capture the excess of the purchase price over the fair value of an acquired asset.

Operating vs. Non-Operating Asset Classification

There is one final distinction to be aware of — which is the classification between:

Operating Asset — Essential to the core ongoing operations of a company
Non-Operating Asset — 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.