Meaning and Different Types of Assets

An asset is a resource or property having a monetary/economic value possessed by an individual or

entity, which is capable of producing some future economic benefit. Assets are generally brought in
business to benefit from them and to increase the value of a business. In simple language, it means
anything that a person “owns” say a house or equipment. In accounting context, an asset is a resource
that can generate cash flows. Assets are found on the right-hand side of the balance sheet and can also
be referred to as “Sources of Funds”.

Assets are classified into different types based on their convertibility to cash; use in business or basis
their physical existence. Assets are a part of the balance sheet and are generally stated at cost or market
value, whichever is lower.

ClassificationofAssets
Assets are generally classified in the following three ways depending upon nature and type:

1. Convertibility: One way of classification of assets is based on their easy convertibility into cash.
According to this classification, total assets are classified either into Current Assets or Fixed Assets.
• Current Assets: Assets which are easily convertible into cash like stock, inventory, marketable
securities, short-term investments, fixed deposits, accrued incomes, bank balances, debtors, prepaid
expenses etc. are classified as current assets. Current assets are generally of a shorter life span as
compared to fixed assets which last for a longer period. Current assets can also be termed as liquid
assets.
• Fixed Assets: Fixed assets are of a fixed nature in the context that they are not readily convertible into
cash. They require elaborate procedure and time for their sale and converted into cash. Land, building,
plant, machinery, equipment and furniture are some examples of fixed assets. Other names used for fixed
assets are non-current assets, long-term assets or hard assets. Generally, the value of fixed assets
generally reduces over a period of time (known as depreciation).

2. Physical Existence: Another classification of assets is based on their physical existence. According to
this classification, an asset is either a tangible asset or intangible asset.
• Tangible Assets: Tangible assets are those assets which we can touch, see and feel. All fixed assets
are tangible. Moreover, some current assets like inventory and cash fall under the category of tangible
assets too.
• Intangible Assets: Intangible assets cannot be seen, felt or touched physically by us. Some examples
of intangible assets are goodwill, franchise agreements, patents, copyrights, brands, trademarks etc.

These are also classified under assets because the business owners reap monetary gains with the help
of these intangible assets. A company’s trademark, brand and goodwill contribute to its marketing and
sale of its products. Many buyers purchase goods only by seeing its trademark and brand in the market.

3. Usage: According to a third way of classification, assets are either operating or non-operating. This
classification is based on usage of the asset for business operation. Assets which are predominantly used
for day-to-day business are classified as operating assets and other assets which are not used in
operation are classified as non-operating.
• Operating Assets: All assets required for the current day-to-day transaction of business are known as
operating assets. In simple words, the assets that a company uses for producing a product or service are
operating assets. These include cash, bank balance, inventory, plant, equipment etc.
• Non-operating Assets: All assets which are of no use for daily business operations but are essential
for the establishment of business and for its future needs are termed as non-operational. This could
include some real estate purchased to earn from its appreciation or excess cash in business, which is not
used in an operation.

Understanding Total Assets and Net Assets

The meaning of total assets is truly reflected in the accounting equation as the sum total of liabilities
and owner’s equity. While “Net Assets” is a term used to state the difference between total assets and
total liabilities. Consequently, it can be noted that net assets and owner’s equity are virtually the same i.e.
both represent the difference between “Total Assets” and “Total Liabilities”

Total Assets = Total Liabilities + Owner’s Equity

Net Assets = Total Assets – Total Liabilities

The following table will give you a clear picture of the types of assets:
Non-operating
Current Asset Fixed Asset Tangible Asset Intangible Asset OperatingAsset Asset

Cash Land Land Goodwill Cash Goodwill

Bank Balance Road Road Patents Bank Balance Patents
Investments Building Building Brand Inventory
Inventory Furniture Furniture Trademark Stocks
Stock Plant Plant Copyright Prepaid Exp.
Receivables Machinery Machinery Receivables
Prepaid Exp. Equipments Equipment Plant
Cash Machinery
Inventory/Stock