What is an Asset?
Most people tend to form a picture of something specific in their head when they hear the word “asset.” It might be a stack of cash or a luxury vehicle, or even a piece of real estate. These answers are all true-to-meaning. An asset is an entity’s property that was acquired or purchased, and has value. This can be physical (cash, inventory), a claim (accounts receivable), a right (copyright, patent) or an assumption (goodwill). Everyone has assets, but not everyone realizes exactly what assets they have or how they’re valued.
If you ever declare bankruptcy (hopefully not), you’ll find out very quickly how many assets you actually have—and how much they’re worth. Bankruptcy court will gauge absolutely every asset you have a claim to as a way to identify your net worth and wealth. For a much simpler way to understand assets and their value, read on.
Types of Personal Assets
An asset is anything that has value or is redeemable for currency. That broad definition opens the door to a wide range of personal asset types. Some of the most common include:
- Cash. The money in your bank account or in your wallet is an asset. In fact, it’s an asset in the purest form of the definition because it’s a universal asset—you can exchange it for just about anything else. Cash equivalents also fall under this category, such as a certificate of deposit.
- Investments. Any stocks, ETFs, annuities, mutual funds or any other investments you hold are assets. This also includes your retirement funds or pension. These assets offer similar liquidity to cash, making them accessible to most people and the primary drivers of economic gain.
- Property. Land or any structures on it constitutes “property” in the traditional sense of an asset. Property is a relatively illiquid asset.
- Personal property. This is a broad umbrella that can include anything from collectors’ items to cars, boats, jewelry, furniture or anything else with value to other people.
- Intangibles. These assets tend to encompass the right to economic benefit. Examples might include royalties from a patent or the rights to a popular brand name.
Assets provide economic benefit either now or in the future. Typically, assets both account for a person’s wealth or provide the means to increase it.
Types of Business Assets
For corporations, there are even more types of assets, such as machinery, inventory or accounts receivable, which factor into the value of the company. Companies can also have cash, property and intangibles. That said, their assets tend to factor into current vs. fixed assets:
- Current assets. Current assets are anything redeemable for cash value within the company’s fiscal year. These are generally liquid assets, such as investments inventory or marketable securities. They’re recorded as general assets on a balance sheet.
- Fixed assets. These are assets that the company actively uses to generate revenue. They’re typically recognized on the balance sheet as property, plant and equipment (PP&E). They’re long-term, tangible assets such as vehicles, machinery, furniture, buildings and the like.
When it comes to companies and corporations, assets provide insight into the worth of a company and its ability to generate revenue. Both are important and both offer implications to how the business makes money or where its estimated value comes from. Investors probing company finances need to pay attention not only to the assets on the balance sheet, but the types of assets and impact on the company.
Assets Fluctuate in Value
Assets are rarely fixed in value and often fluctuate. Look no further than an investment portfolio for a prime example. Even cash and cash equivalents fluctuate in value over time (inflation). With this in mind, it’s important to regularly calculate asset value and track appreciation or depreciation over time. For example, the value of a piece of art may skyrocket after the artist’s death, while a new car’s value might plummet as soon as you drive it off the lot. Consider asset value and the factors that govern it when making investments.
On the Other Side: Liabilities
Assets are only one side of the equation when it comes to factoring total net worth. Liabilities are on the other side. They represent debts owed by a company or individual, including loans, accounts payable, mortgages and accrued expenses. Liabilities aren’t inherently bad. For example, a loan is a liability, but if used to purchase a revenue-generating asset, it’s the means to growth. Every company carries some form of liability on their balance sheet.
Calculating Net Worth
Net worth comes from subtracting liabilities from assets. If the number is positive, you have a positive net worth; if it’s negative, you’re in debt. It’s the same for companies, although many companies—especially startups—are debt-heavy for years. Growth hacking, for example, involves accruing significant debt in pursuit of market share, with the idea that market share is an asset that will provide economic benefit in the form of revenue.
Increasing net worth happens one of two ways: an increase in assets or a decrease in liabilities. Typically, the two happen in tandem—here again, using a loan to purchase a fixed asset is a great example.
Keep Track of Your Assets
Every company keeps track of its assets (and liabilities) via its balance sheet. Investors, to some extent, do the same if they maintain a personal wealth profile or work with a financial advisor. And you can utilize this data to make better investment decisions and build wealth. To learn more, sign up for the Liberty Through Wealth e-letter below.
It’s important to understand the assets you own or to recognize a company’s assets before investing in them. Though they only represent one side of the balance sheet, assets are the key to financial prosperity and economic benefit.