Definition of Assets and Types of Assets

What is an Asset?

Any goods of significant value that are durable and saleable in the market may be treated as Assets.

But sometimes, from an ordinary layman's perspective, anything considered very important to him can be treated as an asset, even though it is not saleable. 

This means that his child is his asset. Or a gift received from his sweetheart can be a great asset for him. His hands, legs, or brain can be treated as assets by him, which are of great importance for his earning and sustenance.

But, as we are currently dealing with Accounts, an asset is something with significant importance and monetary value, and lasts for a durable period and can be easily sold in a market or be exchanged for other goods.

Definition of Asset

Different definitions have been proposed describing an asset. But the essence of all definitions is more or less the same.

"So an asset may be any goods or resource or property having value for some durable period and which generates income or aids in the production of other goods and services which generate income to the holder of that asset."

So from the above definition, you can see that-

• An asset has to be of some value. 
• It should be marketable or exchangeable for other items. 
• It should be of some considerable duration. 
• And finally, it can be anything that generates income for a certain duration of the period.

Types of Assets

The above definition revealed that assets have different qualities. That means there are multiple characteristics of any asset that refer to their durability and exchangeability. Assets have been classified according to their nature and tangibility.

Classification of Assets Based on Liquidity or Convertibility:

One classification of assets is into Current Assets and Fixed Assets based on their convertibility into easy money or hard money.

• Current Assets are more easily convertible into cash or other goods within a short span of time with no legal barriers and procedures. Goods in stock or trade, cash and bank balances, and other sundry advances or deposits fall in this category of Current Assets. Current assets are mostly of a shorter time span and may become obsolete after a certain period.
• Fixed Assets are more of a fixed nature and last for many years, like Land, Roads, Building, Plant, and Machinery, etc. Further, they can not be easily sold or converted. They require adequate legal formalities and considerable time to dispose of. 

Classification of Assets Based on Usage or Utility:

Another classification based on the utility or use of the assets divides the assets into Operating and Nonoperating Assets.

• Operating Assets are those which are required for daily operations of the business, as well as for use in various production processes enabling the business to generate income. So naturally, the working capital like Cash and Bank balance, inventory in use, a stock of semi-finished and finished goods, and Plant and machinery, etc., used for running the business are all termed as operating assets.
• Non-Operating Assets are assets not of much importance for running the business but still held for future plans or disposal. The business production and activities do not get hindered by disposing of those assets. Such assets can include any excess land or buildings kept for future plans and extra cash or funds invested unnecessarily. Inventory of old and obsolete items no longer used for production and inoperative dead balances lying for long periods can also be treated as non-operating assets.

Classification of Assets Based on Tangibility or Physical Nature:

Based on their physical or non-physical existence, assets are classified into Physical and Non-physical assets.

• Physical or Tangible Assets are those which have physical quality and can be seen and felt. All fixed assets, cash, and bank balances, inventory items, debtors, are all tangible assets.
• Intangible Assets can be anything that can not be touched or felt, like a company's Brand name, patent, copyrights, logo, goodwill, and trademark, etc. Even though not physical, these are very useful and important as they promote business and help in increasing sales and profits.