What Are Assets?
An asset is an economic resource that can be owned by an individual, company, or country. Assets are expected to provide future economic benefits like:
Increased value for a company or country
Increased net worth for an individual
Assets accomplish this by providing cash flow, reducing expenses, and/or increasing sales.
Examples of Company Assets
A company lists its assets with a dollar amount on balance sheets. Assets are made up of liabilities and equity on the balance sheet. Common asset categories include:
Property and equipment
Deferred tax asset
Investments and others
Every company needs assets to operate. For example, inventory might be sold for cash in order to cover operating expenses.
Examples of Individual Assets
As an individual, you might not keep a balance sheet for your finances. You should, however, keep a budget or some kind of organized financial record to find your net worth. Net worth is found by subtracting all liabilities (debt) from all assets.
Examples of individual assets include:
- Cash and cash equivalents
- Certificate of Deposit (CDs)
- Investments including bonds, mutual funds, and retirement plans
As an investor, your portfolio is a collection of assets. It is widely believed that an individual's portfolio should include assets from several different categories, a practicecalled asset allocation.
Types of Assets
Assets are broken into categories based on liquidity and function. On the balance sheet, they’re presented according to whether the asset will/can be used up within the next 12 months.
Liquid assets are either cash (on hand) or those that can be quickly converted to cash. One example is cash held in a checking or savings account.
Current assets are assets that are expected to be consumed or converted into cash within one year. These fund day-to-day operations at a company. Examples include cash, short-term investments, inventory, and accounts receivable (which is the expected payments from customers for goods or services performed).
Fixed assets (also known as long-term assets) are expected to be consumed or converted to cash after one year's time. You can find fixed assets beneath current assets on the balance sheet. Fixed assets like property (e.g. office space, buildings, equipment) are important because they support the operation of a business over the long term.
Intangible vs Tangible assets
Assets are categorized by function/form. A tangible asset has a physical form (e.g. buildings equipment) while intangible assets do not (e.g. patents, trademarks, copyrights). A combination of tangible and intangible assets make up all of a company’s assets.
However, an asset must be able to be measured reliably. That’s why goodwill is normally not included on a company balance sheet (except in the case of an acquisition or merger).
Assets on the Balance Sheet
Below is an example of assets listed on a company balance sheet for Wal-Mart.
What Are Asset Bubbles?
You may have heard the term “bubble” used in relation to real-estate or certain stocks. An asset’s bubble is when its value rises dramatically in a short period of time – but isn’t supported by a product’s value. A bubble occurs when investors buy an asset and increase the price rapidly, well beyond its actual value. Eventually, demand falls and prices crash, causing the bubble to burst.
A great example of this is the Tulip Bubble (1636-37) in the Netherlands. When certain bulbs with a virus produced flowers with spectacular and unique color combinations, there was a massive boom in tulip future trading*. Owning these tulips was a symbol of status, which drove prices up rapidly. Of course, the bulbs themselves were not worth this price increase. The tulip bubble burst a year later when the futures were due, but the prices had fallen.
*Future Trading is a contract where the buyer agrees to pay a certain price for a defined asset at some future date. Futures trading is the trading of such contracts.
What Is Asset Management?
Assets create or preserve wealth, making them incredibly important to both individuals and companies. There are two definitions of asset management:
- Company asset management ensures that all tangible and intangible assets are maintained and continue to provide value to the company.
- Asset management may also be a service provided by a firm or company to help maintain and grow the investor’s assets. Financial institutions and banks offer asset management in order to make important investment decisions on behalf of their clients.
You should know how much value your assets provide. If managed well, assets can be used to increase your net worth or a company’s overall value.