What is the definition of an asset? Under U.S. Generally Accepted Accounting Principles the technical definition of an asset is that they are “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.”
A much simpler definition of assets is that they are items that the company controls that they can use to either increase revenues or satisfy debts. Assets can either be physical items like cash or property, or they can be intangible items that still provide benefits such as patents.
Assets can be broken out into two main categories and you will typically see both on a company’s balance sheet.
- Current Assets – Currents assets are assets that are reasonably expected to be used up or converted to cash during the company’s business cycle, typically one year. One example of current assets is inventory. A typical retail business would expect for their inventory not to sit on the shelf for over year in most instances. Another example would be accounts receivable from customers. Again, most businesses expect to be paid within one year of when the customer or client purchases the item or service.
- Long-Term Assets – Long-term assets are the opposite of current assets. Company’s typically expect to hold onto and use these types of assets longer than one year. A perfect example to fit this definition is property and equipment, such as a building. Most company’s would not expect to buy and sell their buildings every year and would classify them as a long-term asset.
Below is a list of typical accounts you will see under each definition of assets:
- Accounts Receivable
- Prepaid Expenses
- Marketable Securities
- Other Current Assets
- Buy and Hold Investments
- Property and Equipment
- Intangible Assets
- Long Term Loans Receivable
- Other Long-Term Assets
Please contact us if you have any questions about this or any other areas of your small business.