When it comes to stock investing, investors are investing in companies after doing due diligence in terms of research about any company’s financial health. There are many factors of companies that tell investors about the financial health of a company. These include the company’s debt, the company’s assets, and other variables determining the company’s financial performance and standing in the industry. Asset meaning is vital if investors wish to know whether a company is sound enough to invest in.
In a broad sense, assets are resources that have economic value for an individual, a company, or a country. Assets are owned or controlled by the individual, company or country in question, with the expectation that they (the assets) will provide a benefit in the future.
For a company, company assets are resources that a company owns or controls and are reported on the company’s balance sheet. They can be categorised as fixed, current, intangible, and financial. They are bought by companies or are created by companies, to increase any company’s value or benefit the company in its operations.
You can think of an asset as something that, at some time in the future, may generate a flow of cash, reduce expenses, or generate an improvement in sales, regardless of whether it is a patent, manufacturing equipment or any other asset of the company.
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Asset meaning becomes clearer if you think about an asset representing an economic resource which can be owned or controlled by any company. A resource such as this may be scarce. Furthermore, it can create economic benefits as it can generate cash inflows, or it could decrease cash outflows.
An asset may also be representative of access that other people or companies may not have. Additionally, a right or any other kind of access can be enforced legally, which simply means that the economic resources belonging to a company may be used at the discretion of the company. The use of such assets may be limited or precluded by an owner.
So, this brings us to the question of what can be considered an asset. An asset is something that a company possesses a right to as of the date of the financial statements of the company. Assets may be broadly classified into short-term (current) assets, fixed assets, investments of a financial nature, and intangible assets.
The following are the key types of assets:
Current assets are assets of a short-term nature. These are economic resources that may be converted into cash or may be consumed within a year. Current assets include cash as well as cash equivalents, accounts receivable, inventory, and several prepaid expenses. Cash may be easy for accountants to value, but the reassessment of the recovery of accounts receivable and inventory has to be conducted periodically. If evidence of a receivable which is uncollectable exists, then it may get categorised as impaired. Furthermore, if the inventory turns obsolete, a company may write off this as an asset.
Fixed assets may be considered economic resources with a life that is expected to last more than a year. These could be manufacturing plants, buildings, equipment, etc. Depreciation, an accounting adjustment, is made for assets of a fixed nature as they age. Depreciation allows for the allocation of the cost of an asset over a period. The fixed asset’s loss of earning power may or may not be reflected by depreciation.
In terms of types of assets, depreciation is important where a company is concerned. Depreciation can be evaluated for a fixed asset in any of two ways. One way is to assume that a fixed asset loses value in the first few years of its use. Another way represents the assumption that a fixed asset loses value proportionate to its useful life or usability.
These represent securities of other companies and investments in the assets. They include, among other things, stocks, corporate and sovereign bonds, hybrid securities, etc. Financial assets get evaluated based on the underlying security and supply and demand of the market.
Economic resources that provide a beneficial value to a company, but have no physical presence, are termed intangible assets. They include such things as patents, trademarks, goodwill, and copyrights. Accounting for these kinds of assets varies according to the type of asset. They can be either tested for impairment or amortised every year.
While an asset represents something of economic value that a company owns or has a right to, a liability is something that a company owes, like a debt. When you open a demat account to invest in a potential company’s stock, researching a company’s assets and liabilities will help you be informed about a company’s standing in the industry or sector. This can be said of any company that is about to release an upcoming IPO too.