Valuing a company or preparing its financial statements requires a good grasp of assets and their classification. There are many different ways to classify assets, but there are three key criteria when preparing the balance sheet: liquidity, tangibility, and use. As there are two categories for each classification, there are six types of assets that you need to consider when preparing your financial statements.
In this article, you will learn about assets and their classification according to the main three criteria. You will also learn about the six categories of assets, with examples of the assets included in each category. To learn more about financial statements or company valuations, check out these articles below:
- What Is a Cash Flow Statement (And How to Prepare It)
- How to Read a Balance Sheet
- Financial Statement Analysis
- How to Calculate the Value of a Company
What are Assets? and How are Assets Classified?
An asset is a resource owned by an individual, corporation, or institution that has or is expected to have a monetary value. Assets can be classified according to many criteria, but their liquidity, tangibility, and use are the three most common classifications.
The liquidity of assets refers to how quickly they can be turned into cash. This is an important aspect and accounts for the main division of assets on the balance sheet: current vs. non-current. Tangibility refers to whether the assets have a physical presence. For example, a computer is a tangible asset, but the software it runs is not. Finally, assets can be classified according to their use or purpose: operational vs. non-operational.
Types of Assets
According to the three classifications of assets described in the previous section, there are six types of assets to consider. Below, you have descriptions and examples of each.
Current Assets
Current assets are also known as liquid assets. In other words, they are assets that can be turned into cash or cash equivalents in under a year. Current assets are listed first on the balance sheet, and their value will determine the company’s liquidity ratios. The most liquid assets are cash, accounts receivable, and marketable securities. Any supplies, as well as goods or products, are also considered liquid assets, but it could take longer to convert them into cash.
Non-Current Assets
Non-current assets are also known as fixed or long-term assets, which are included below current assets on the balance sheet. Unlike current assets, these cannot be converted into cash in less than a year. The cost of non-current assets is usually split over the asset’s useful life, rather than just the date of purchase. Depending on its type, depreciation, amortization, or depletion will apply. Buildings, land, vehicles, machinery, and equipment.
Tangible Assets
Tangible assets are those that have a physical presence. In other words, you can see and touch them. The assets on the balance sheet are first classified as current or non-current, but they are also classified by their tangibility. For example, cash and inventory are both current and tangible assets. Supplies, buildings, machinery, and equipment are also classified as tangible assets. Unlike intangible assets, tangible assets have associated costs related to storage, maintenance, and distribution.
Intangible Assets
Intangible assets are those that have no physical presence. Unlike tangible assets, they cannot be seen or touched, and their value is usually determined by the company. The value of intangible assets is not as stable, but they are easier to manage and store, and transfer of ownership does not require any transport. Some common intangible assets include intellectual property, patents, copyrights, and goodwill.
Operating Assets
Operating assets refer to those that are needed for the company’s daily operations and have a direct effect on the generation of revenue. These can include current and non-current assets, as well as tangible and intangible assets. These assets directly affect the company’s profitability and are used to calculate important financial metrics, like net operating assets or the asset turnover rate. Some common operating assets are cash, buildings, machinery, patents, and copyrights.
Non-Operating Assets
Non-operating assets are also known as redundant assets. While they are not necessarily needed for daily operations, they can still generate revenue for the company. For example, your company may buy some land that it plans to use in the future. This vacant land is not yet part of the company’s operations, but it certainly has value and the potential to generate revenue for the company. Non-operating assets can include marketable securities, short-term investments, interest income on fixed deposits, and vacant land or buildings.
Examples of Assets and Their Types
The list below contains examples of assets in the six categories described in the previous section.
- Current Assets: cash, marketable securities, accounts receivable, supplies, goods, and products.
- Non-Current Assets: buildings, land, vehicles, machinery, and equipment.
- Tangible Assets: cash, inventory, supplies, buildings, machinery, and equipment.
- Intangible Assets: intellectual property, patents, copyrights, and goodwill.
- Operating Assets: cash, buildings, machinery, patents, and copyrights.
- Non-Operating Assets: marketable securities, short-term investments, interest income on fixed deposits, vacant land, or vacant buildings.
Conclusion
As you have seen, accurately classifying assets is important for individuals, corporations, and institutions. Accurate classification and valuation of assets are crucial for corporations and institutions, as you need to report them in financial statements, such as the balance sheet, for creditors, investors, and shareholders.
You now know the three main criteria used to classify assets in financial statements and the resulting six types of assets. You have descriptions and examples of the six types, so you can accurately classify your assets when preparing your financial statements. Additionally, you can use this information to better understand other companies’ balance sheets.
To learn more about financial statements and the methods used for their analysis, take a look at:
- How to Read a Balance Sheet
- Financial Statement Analysis
