Types of Assets: Defination and Classification
Asset a most important item of the balance sheet can be classified from different perceptions. In the following discussion different types of assets are described including their definition.
Asset: Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings.
From an accounting perspective, assets are divided into the following categories: Current assets (cash and other liquid items), long-term assets (real estate, plant, equipment), prepaid and deferred assets (expenditures for future costs such as insurance, rent, interest), intangible assets (trademarks, patents, copyrights, goodwill). Something valuable that an entity owns, benefits from, or has use of, in generating income. In accounting, an asset is something an entity has acquired or purchased, and which has money value (its cost, book value, market value, or residual value).
An asset can be (1) something physical, such as cash, machinery, inventory, land and building, (2) an enforceable claim against others, such as accounts receivable, (3) right, such as copyright, patent, trademark, or (4) an assumption, such as goodwill. Assets shown on their owner's balance sheet are usually classified according to the ease with which they can be converted into cash.
At first we classify assets into tangible assets and intangible assets. Definition and explanation are given below:
Tangible asset: Assets having a physical existence, such as cash, equipment, and real estate; accounts receivable are also usually considered tangible assets for accounting purposes. In short, it is the opposite of intangible asset.
Intangible asset: Something of value that cannot be physically touched, such as a brand, franchise, trademark, or patent. In short, it is the opposite of tangible asset. All the tangible assets are described below with examples.
Trademark (™): A distinctive name, symbol, motto, or design that legally identifies a company or its products and services, and sometimes prevents others from using identical or similar marks. Distinctive design, graphics, logo, symbols, words, or any combination thereof that uniquely identifies a firm and/or its goods or services, guarantees the item's genuineness, and gives it owner the legal rights to prevent the trademark's unauthorized use. A trademark must be (1) distinctive instead of descriptive, (2) affixed to the item sold, and (3) registered with the appropriate authority to obtain legal ownership and protection rights. Trademark rights are granted usually for 7 to 20 years and, unlike in case of patents, are renewable indefinitely. These rights are protected worldwide by international intellectual property treaties and may be assigned by their owner to other parties. Although a trademark has no limited term of existence, the rights to use it may be lost due to misuse or lack of use. Trademarks are divided into 42 international classes, each class representing similar goods or services. Whereas a trademark may be registered under multiple classes, it is protected only in the class (es) relevant to the business or trade area of the item. And, whereas the use of symbol 'TM' does not provide any legal benefit, it precludes the infringer's defense of lack of knowledge of a trademark claim. Costs incurred in design and registration of, and in defending, a trademark is usually amortized over the life the trademark or 40 years, whichever is shorter. In balance sheets, trademarks are identified as intangible and, in some cases such as Coca Cola Co., are far more valuable than the firm's all other assets. The term trademark includes the associated term service mark (SM).
Copyrights (©): It is a legal monopoly that protects published or unpublished original work (for the duration of its author's life plus 50 years) from unauthorized duplication without due credit and compensation. Copyright covers not only books but also advertisements, articles, graphic designs, labels, letters (including emails), lyrics, maps, musical compositions, product designs, etc. According to the major international intellectual-property protection treaties(Berne Convention, Universal Copyright Convention, and WIPO Copyright Treaty) five rights are associated with a copyright: the right to: (1) Reproduce the work in any form, language, or medium. (2) Adapt or derive more works from it. (3) Make and distribute its copies. (4) Perform it in public. (5) Display or exhibit it in public. To acquire a valid copyright, a work must have originality and some modicum of creativity. However, what is protected under copyright is the 'expression' or 'embodiment' of an idea, and not the idea itself. A copyright is not equivalent of legal-prohibition of plagiarism (which is an unethical and unprofessional conduct, but not an offense), and does not apply to factual information.
Patents: Limited legal monopoly granted to an individual or firm to make, use, and sell its invention, and to exclude others from doing so. An invention is patentable if it is novel, useful, and non-obvious. To receive a patent, a patent application must disclose all details of the invention so that others can use it to further advance the technology with new inventions. Patentable items fall under four classes (1) Machine: apparatus or device with interrelated parts that work together to perform the invention's designed or intended functions, (2) Manufacture: all manufactured or fabricated items, (3) Process: chemical, mechanical, electrical or other process that produces a chemical or physical change in the condition or character of an item, and (4) Composition of matter: chemical compounds or mixtures having properties different from their constituent ingredients. In most of the world, patents are granted on the 'first to apply' basis, with a protection period of 7 years (India) to 20 years (European Union). In the US, they are granted for 17 years on the 'first to invent' basis. Responsibility of identifying, locating, and suing the patent violators, however, rests solely with the patent holder; patent law provides only means of prosecution and determination of just compensation. In short, it is the exclusive right, granted by the government, to make use of an invention or process for a specific period of time, usually 14 years.
Goodwill: It is an intangible asset which provides a competitive advantage, such as a strong brand, reputation, or high employee morale. In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company. In other words, it is assumed value of the attractive force that generates sales revenue in a business, and adds value to its assets. Goodwill is an intangible but saleable asset, almost indestructible except by indiscretion. It is built painstakingly over the years generally with (1) heavy and continuous expenditure in promotion, (2) creation and maintenance of durable customer and supplier relationships, (3) high quality of goods and services, and (4) high quality and conduct of management and employees. Goodwill includes the worth of corporate identity, and is enhanced by corporate image and a proper location. Its value is not recognized in account books but is realized when the business is sold, and is reflected in the firm’s selling price by the amount in excess over the firm’s net. In well established firms, goodwill may be worth many times the worth of its physical assets. GAAP require the firm's purchaser to write off (amortize) the amount paid as goodwill over a period (usually 10 to 30 years) for financial reporting purposes.
Brand: It is an identifying symbol, words, or mark that distinguishes a product or company from its competitors. Usually brands are registered (trademarked) with a regulatory authority and so cannot be used freely by other parties. For many products and companies, branding is an essential part of marketing. Unique design, sign, symbol, words, or a combination of these, employed in creating an image that identifies a product and differentiates it from its competitors. Over time, this image becomes associated with a level of credibility, quality, and satisfaction in the consumer's mind (see positioning). Thus brands help harried consumers in crowded and complex marketplace, by standing for certain benefits and value. Legal name for a brand is trademark and, when it identifies or represents a firm, it is called a brand. Royalty Compensation, consideration, or fee paid for a license or privilege to use an intellectual property (brand, copyright, patent, process) or a natural resource (fishing, hunting, mining), computed usually as a percentage of revenue or profit realized from the use.
Franchise: A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees)operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee.
Assets are also classified under the following categories:
Quick asset: Cash and other assets which can or will be converted into cash fairly soon, such as accounts receivable and marketable or equivalently current assets minus inventory are called quick assets.
Current asset: A balance sheet item which equals the sum of cash and cash, accounts receivable, inventory, marketable, prepaid expenses, and other assets that could be converted to cash in less than one year. A company's creditors will often be interested in how much that company has in current assets, since these assets can be easily liquidated in case the company goes bankrupt. In addition, current assets are important to most companies as a source of funds for day-to-day operations.
Fixed asset: A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real, and furniture. These types of assets are also called plant.
Long term asset: These are Balance sheet term for capital assets held for longer than one accounting period (usually a year) and shown at their book value.
Short term asset: In general, asset with a lifespan of five years or less is called short term asset.
Wasting asset Accounting: (1) Fixed assets (excluding real estate) that has limited (though not necessarily predetermined) useful life and is, therefore, subject to depreciation. (2) Natural resource such as coal, gas, oil, ores, timber, that diminishes in value due to depletion, extraction, or removal and is, therefore, subject to amortization. Securities industry: put option or call option whose value expires on a fixed date Operating asset Asset acquired for or used in the income generating operations of the business (such as cash, inventory, prepaid) and various fixed, long-term assets(such as plant and equipment).
Non-performing asset: Lease or loan where the (1) lessee or borrower is not making timely payments, (2) payments are no longer anticipated or, (3) maturity date has passed without fulfillment of the agreement. In such cases, the lesser or lender may allow some time (typically not exceeding 90days) before asking for additional collateral, demanding the full payment of the balance, or taking repossession or foreclosure action.
Deferred asset: Prepaid recurring expense (such as insurance, interest, or rent) carried forward as an asset, until the associated service or benefit is received. Financial asset Money at hand, or easily accessible, in the form of cash deposits, checks, loans, accounts receivable, and marketable (bonds, notes, shares).
Real asset: Actual, tangible asset (such as valuable antique or art, buildings, coins, commodity, machinery and equipment, stamp collection) as opposed to financial assets (such as bonds, debentures, shares).
Contra asset: It is an asset account that offsets an associated account. For example, accumulated depreciation account that reduces the original cost of an asset to arrive at its book value is a contra asset.
Paper asset: Asset (such as obsolete equipment) that is included in the balance, but can neither be used nor sold is called paper asset.
H.S.C from Gazipur Cantonment Board College; BBA & MBA from Dhaka University major in Accounting and Information Systems.View all articles by Ashraful Rasel