Table of Contents:
- Understanding what assets are
- Examples of assets
- Asset types
- How to determine the value of assets
- Whats an asset? FAQs
- The bottom line
One way we measure the monetary value of individuals or companies is to examine their assets. Assets are a resource owned by an individual or company that can produce revenue or be liquidated into cash and provide future economic value.
Business assets can increase a companys value and be beneficial for running day-to-day operations and expanding the business. Likewise, personal assets can increase an individuals net worth. They can be physical items, such as equipment and furniture, or intangible items, such as trademarks.
Key takeaways
- Assets provide economic value and can be both tangible and intangible.
- Individuals can own personal assets, including vehicles, property, and investments.
- Companies own business assets, such as machinery, business vehicles, and trademarks.
- Businesses list their assets on a balance sheet along with liabilities.
- Individuals collect assets for personal finance and wealth building.
Understanding what assets are
Assets are economic holdings owned by a company or individual, giving them both legal rights and the right to use them as they wish. For a resource to be regarded as an asset, it must meet specific criteria that include:
- Ownership – means the company or individual must either own or have control of the asset with the legal right to liquidate it for cash. This ownership restricts others from having any control over the asset.
- Monetary value – assets must be able to be sold for money or provide future economic benefits.
- Valuable resources – assets can be sold and used to produce positive cash flow in the present or future.
Businesses, individuals, and the government all can acquire assets anticipating they will provide either short-term or long-term economic value. Over time, assets can increase in value or decrease in value.
Assets are accumulated as a means of building wealth. For businesses, they are viewed and used to advance growth in the company in the form of inventory, manufacturing equipment, and sales. Individuals use assets for financial confidence and wealth building.
Assets and net worth
When evaluating the financial health of either a company or an individual, the one metric we look at is net worth. Since assets are resources that provide economic value, theyre directly related to how we determine net worth and liquid net worth.
So, what is net worth? Its defined as the value of the assets owned minus any liabilities owed and is used to provide a clear picture of an individuals or companys financial position and overall financial health.
To simplify, the formula to determine net worth is assets – liabilities = net worth.
So, net worth is the difference between what we possess (ownership) minus what we owe to others. We have a positive net worth if our assets are greater than our liabilities. If our liabilities are greater than our assets, we have a negative net worth.
When we determine our net worth, we can see our financial situation at the present moment, so if our intention is to build wealth, calculating our net worth can alert us to whether or not were on track and if adjustments are needed.
The good news is that we can increase our net worth if need be. These 5 steps can get you started.
- List liabilities – list all your monthly debts. If you can eliminate any of them by paying them off, do so and consider transferring high-interest credit card debt to one with no or low interest, and think about if refinancing makes sense. Then, develop a payoff plan for the rest. Eliminating debt increases your net worth.
- List all assets – list what you own and its worth if you know it. Assets will include such things as: Home and property, including rental properties and vacation homes. Investments and retirement accounts, money markets, and cash. Valuable items such as art, antiques, jewelry, etc.
- Examine and trim expenses, such as cable bills, cell phones, and a Starbucks coffee habit. Most of us can cut back on a variety of expenses that we dont even think about, like lunches, subscription services, and groceries. To get rid of significant expenses, examine the details: Evaluate your insurance and other policies to see if you can get better rates and then work on habit spending. The less you spend, the more you can pay down debts, save an emergency fund, or invest.
- Tackle the big expenses, such as loan debt for college or a mortgage. Accelerating payoff on big debts can significantly impact your average net worth and give you peace of mind.
- Monitor spending going forward. Writing down or keeping track of spending in a financial program, such as Quicken, can help you keep detailed records of where you spend. Being conscious of our spending can help us focus on our financial goals and stay on track to achieve them.
Examples of assets
When we think about the definition of assets and why they hold value, its essential to keep in mind that we define assets as things that offer potential economic benefits to individuals or businesses either currently or in the future. They can consist of both short-term investments and long-term investments. In other words, an asset is something you own or is owed to you that has monetary value.
Examples include:
- Cash/cash equivalents
- Furniture
- Vehicles
- Inventory
- Money owed/accounts receivable
- Real estate
- Property
- Equipment
- Investments
- Patents
- Copyrights
- Intellectual property
Asset types
Assets can be put into various categories that assist in identifying and valuing their worth, how quickly they can be liquidated and converted into cash, and determine their creditworthiness.
Categories include both physical and non-physical assets. They include:
Financial vs. real assets
In general, assets can be defined as either real or financial. Financial assets are liquid assets that can be converted into money quickly, such as investments in stocks, bonds, mutual funds, cash, and other securities. Real assets include physical items such as real estate, equipment, vehicles, and inventory that can help a company or individual generate income.
- Financial assets – have an easily recognized economic value that can be converted into cash quickly.
- Real assets – are high-value physical assets that can take time to convert into cash.
Tangible vs. intangible assets
Additional types of assets can be tangible or intangible, where tangible assets are physical assets like machinery, furniture, real estate, and inventory, and intangible assets exist on paper, such as permits, trademarks, brand names, and patents.
Two types of tangible assets that are important to understand include:
- Current assets – assets that can be converted into cash within a year and include cash, property, inventory, and other assets that can be quickly converted.
- Fixed assets – assets in use for a year or more and are recorded on a companys balance sheet and financial statements. They include office furniture, vehicles, buildings, inventory, and equipment used to run a business.
Current vs. noncurrent assets
When a company evaluates its resources, they divide them into current and noncurrent assets. Current assets are used to run the business but can be converted into cash in about a year.
Examples include:
- Cash
- Inventory
- Prepaid expenses
- Accounts receivable
Noncurrent assets are long-term assets and are anything that wouldnt be considered a current asset and include:
- Property
- Land
- Equipment
- Trademarks
How to determine the value of assets
When we think about our assets, some may be easier to put a value on than others. For example, our investments current market price or the amount of cash in a money market fund. Real estate can be determined by an appraisal and market conditions. For antiques and collectibles, an appraiser can offer a valuation based on condition, age of the piece, and origins.
Other assets may need another approach. Some of the companys assets can be valued using a companys balance sheet, which keeps track of assets and liabilities, or by using a cost approach, which is determined by the cost to replace an item. Using the discounted cash flow approach is beneficial for businesses and individuals and uses a formula to determine values based on possible future earnings.
Whats an asset?FAQs
Q: What does asset mean, and how do you determine if something is considered an asset?
A: If an item can provide economic benefit currently or in the future, its an asset. The rule of thumb is if its owned, such as property, or owed, such as a loan, its considered an asset.
Q: Can investing increase net worth if Im just getting started?
A: Yes. Even investing as a beginner will positively impact your overall net worth.
Q: What if an assets not a physical item?
A: Non-physical or intangible items can be considered an asset as long as you have ownership. They include a business license, patents, trademarks, leases, brands, brand reputation, and contracts are all assets that can provide current or future economic benefits.
Q: Would labor from employees be an asset?
A: Since labor is done by individuals who are paid for their work, its not an asset, even though some companies call their employees their biggest asset.
The bottom line
Whether for a business or an individual, assets help determine economic value and contribute to current or future financial benefit. Both tangible or intangible, assets are valuable for building wealth, providing financial stability, and determining creditworthiness.
There are various ways to build wealth, and one of them is investing for the future with stocks. To learn more about getting started, download the Public app today!