Accounting / Bookkeeping Basics: What Is An Asset?

What Is An Asset?
It’s easy enough to understand that assets are things that have value that your company owns. But you can’t just total up everything you own, then place the amount in one huge asset account. Even your company’s cash reserves will have to separate into different accounts – main checking account (cash) and petty cash, with retained earnings placed in a revenue account. The reason for this specificity is to allow for more control over your company’s finances. For example, you will pay all your monthly bills and routine expenses out of your cash account, but you should also fund a petty cash account, so employees have access to funds for unexpected per diem accounts and unplanned purchases.

The following is a list of some of the types of accounts commonly listed under Assets:
-     Cash: There may be serval cash accounts or only one, depending on the structure of your company. If you have more than one account into which you make deposits or withdraw money for purchase, each of them should be identified:
○     Petty cash
○     Business Checking
○     Business Savings
-     Accounts receivable. Total amount of all unpaid invoices sent to customers for goods and services sold. This account is separate from cash because you have not received the money yet.
-     Inventory. The total value of all items your company currently possesses, and that you intend to sell.
-     Equipment. The total value of all business equipment that you have purchased and own outright.
-     Buildings. The total value of any buildings your company owns.
-     Land. The total value of all undeveloped land your company  owns.
-     Investments. The total value of all securities investments your company owns.
-     Prepaid expenses. If your company prepays expenses such as rent or insurance, you may create an account to keep track of the value:
○     Prepaid rent
○     Prepaid insurance
-     Supplies. This may be included as part of the equipment account, or you may create a separate account, depending on the nature and complexity of your business.

Current Assets
Current assets are going to be any that the company owns that have a lifespan that is a year or less. This means that the asset has to be easily changed over to cash if the company needs to. Such assets will include inventory, accounts receivable, and cash or cash equivalents.
Cash, which is the most fundamental and most commonly thought about the current asset, can also include checks and bank accounts that are not restricted. Cash equivalents are going to be assets that are very safe, but which can also be turned into cash quickly if the company needs. The U.S. Treasury is a good example of this. And then there are the accounts receivables, which are going to show the reader any of the obligations that customers and others owe to the company over the short-term. These sometimes happen if a company allows the customer to use credit to purchase the product or service.
Inventory is an important current asset as well. Inventory can include things like the raw materials to make a product, the products that are still in the process of being created, and the finished goods. Each company is going to be different, and the exact way that the inventory account looks is going to be different. For a manufacturing firm, there may be a lot of raw materials, but a retained firm wouldn’t have any raw materials.

Non-Current Assets Liabilities

Long-Term Assets

Besides just the current assets there are some long-term assets.  These assets are usually assets that you hold for periods that are more than one year.  These also represent the future growth of the business.
Some of these long-term assets can include but are not limited to:
Land
Vehicles
Computers
Machinery
Equipment
Securities
Stocks
Bonds

Businesses use these long-term assets to produce revenue.  The longer the asset the better.  It will cut costs and make the business produce more income.  This will also make your business more valuable.  In return it will increase stock prices.  However, you do need to be careful.  It is possible to have too many long-term assets.  If you have too many then the company or business may not have enough capital and could have trouble keeping up with expenses and liabilities.  However, on another note, having too few long-term assets could also harm the company.  This could make it vulnerable to changes and difficult to fight against the competitors.

Fixed Assets
With fixed assets the main purpose is to create revenue.  These types of assets are not to be sold.  Even though fixed assets cannot be turned into cash they do enhance the value of your company.
Due to the GAAP a fixed asset must be recorded on a balance sheet at a cost value and not market value.  This is considered a historical cost principle.  There are several reasons why they are treated as a historical cost principle.
Cost can be easily verified in an audit.  This is done by checking a receipt. Whereas, market value is highly subjective.
When a company starts it is assumed that they are not going to be selling off assets and shutting down.  As long as the business intends to stay in business the market value of a fixed asset is irrelevant.  This is because the function of the asset is to produce revenue and not to be sold.

According to the GAAP it is required for a company to recognize revenue and expenses in a financial period when they are earned or incurred.
The initial cost of an asset was recorded on the balance sheet when it was purchased.  Therefore, the amount of depreciation must be listed as an expense over the span of life used for that asset.
Land is one of the most common and expensive fixed assets.  It will include everything on ground (for example grass, fences, and trees), over the ground (for example air, space), and under the ground (such as minerals).  It is supposed to have the longest lifespan or even indefinite.  This is because the only thing that may shorten the lifespan of land is a natural disaster.  This is a valuable asset as it usually is not used up, destroyed, or stolen.  On the balance sheet it will reflect the cost of the land.  With that it will also include incidental cost such as surveys, insurance, legal fees, and property taxes.
Buildings, much like land, are expensive and a valuable fixed asset.  They indirectly produce revenue.  The cost of acquiring buildings usually includes insurance, closing costs, taxes, and the purchase price.  They do not last forever.  Therefore, they have a finite lifespan.
For all business your equipment is essential.  Much like buildings they indirectly produce revenue.  The cost of equipment generally includes the purchase price, sales tax, and delivery fees.
While looking at the long-term assets you need to remember that any asset that is purchased and lasts more than one year is a capital expenditure.  These expenditures are recorded on the balance sheet.  Usually they include large purchases that bring a lot of value to your company or business.  These will not be listed in expenses because they will not be used up in the current accounting period.
So we talked about the bigger assets but what about the smaller ones such as a coffee maker, trashcan, or a light bulb?  These are considered revenue expenditures.  These will last several accounting periods.  Even though $500 is a common limit for the maximum cost of this type of expenditure it can vary based on the company or business.  These assets are not recorded in the balance sheet.  They are usually listed as an expense to make it easy to record them.