What Is an Asset?

In financial and investment terms, net worth is defined as a person’s or entity’s total assets minus their liabilities. Both should be headers on your balance sheet. What is an asset — and are you sure you’re catching everything of value in your calculations?

Several items, properties and ideas could be considered part of asset management. Benzinga explains what they are in this post. 

How Do Assets Work?

An asset is anything you own or control that’s considered to be of value. Assets can be tangible, tactile items like a car, real estate or equipment. They can be financial holdings like stocks and bonds. They can also be intangible items like patents, trademarks and intellectual properties.

The definition of an asset implies that it can or will be used to gain some kind of economic benefit. If you have a house that you intend to sell, it’s an asset. If you have a patent for a new product you’ve invented, it’s an asset. If you’re holding on to stocks and bonds that you may sell someday, they’re assets.

Business assets are calculated to gauge the financial health and value of companies and organizations. Personal assets are used to evaluate individual wealth, particularly in lending or credit approval scenarios.

Categories of Assets

Assets are broadly categorized as current and non-current. Current assets can be used or converted into cash in short order. Non-current assets are ones unlikely to be sold anytime soon.

From there, in any financial scenario, large or small, it’s important to organize and specify assets on a balance sheet. Here are some of the narrower categories assets fit into.

Fixed Assets

A fixed asset is something you use for business operations or personal purposes. Generally, but not always, fixed assets are bigger items. In a business, fixed assets might be equipment, buildings, company cars or furniture. For personal finance, real estate, cars, appliances, precious gems or furniture would be considered fixed assets.

Fixed assets are non-current. Although they have a given value, they don’t generate revenue on their own and aren’t convertible to quick cash. In business, fixed assets depreciate or lose value in their lifecycle. 

Current Assets

Breaking down current assets further, they are items or resources projected to be spent, deployed or converted into cash within a relatively short time. In businesses, that time is usually within one year. Cash on hand is a current asset: You can expect a business to spend money at any time to generate income. Inventory is also a current asset because it’s intended to be sold at any time.

A couple of accounting principles are also considered current assets. Accounts receivable are payments that customers or clients will eventually pay to you. Prepaid expenses like rent, utilities, insurance and advertising are advance expenditures for things a business uses over time. Both accounts receivable and prepaid expenses are considered current assets. 

Intangible Assets

An item doesn’t need a physical presence to be an asset. Intangible assets are concepts that hold considerable value even though they can’t be seen or touched. In business, intangible assets may include patents, trade secrets, trademarks and general intellectual property. They can also include software, licenses, contract agreement, R&D or a company’s business relationships and reputation.

Intangible assets are listed on a business’s balance sheet alongside tangible ones. To count as assets, they must be quantifiable and measurable in some way. Many intangible assets are subject to periodic evaluations to ensure they’re still worth their given value.

Financial Assets

Stocks, bonds, mutual and exchange-traded funds (ETFs), T-bills and more make up a person’s or entity’s financial assets. They are called marketable capital assets because they can be bought and sold fairly easily. They’re listed on a stock exchange or available through a brokerage.

Other items that cannot be traded publicly or easily can be financial assets as well. Real estate, venture capital, pension funds and private equity all have low liquidity, but there’s no questioning their value. 

Importance of Investment Diversity With Assets

When discussing a business’s or person’s investment portfolio, financial experts use the word diversification. This concept refers to having multiple investments across different sectors or types. For example, a portfolio with holdings in healthcare, energy, technology, consumer staples, financials and industrials could be considered diversified. In fact, it could get even more diverse.

Diversification is important to maintain for a few reasons. The most cited reason is risk management. Business sectors behave differently in certain market or economic conditions. 

Say your tech stocks are going through a hard time right now, but your consumer staples stocks are riding high. So your consumer stocks’ superior performance is, for the moment, balancing your tech stocks’ slowness. That’s how diversification manages and offsets risk.

Having a diverse portfolio can be a guardrail for capital preservation. If you tie all of your investments into just one sector or area, then your entire financial health rides and dies with it. If it drops in value or wipes out completely, your value tanks as well. With investments in several different sectors, you don’t stand to lose as much.

You can also mix up the types of financial instruments you invest in to be diverse. You can hold dividend-paying stocks and bonds to generate income alongside blue-chip or buy-and-hold stocks for overall stability.

Factors to Consider When Evaluating Assets

When assessing or evaluating your current assets, you should review as many aspects of them as you can. Some of the most important factors include:

• Current market value
• Return on investment (ROI)
• Performance history
• Timing of hold period (long- or short-term)
• Income generated
• Management fees or expenses
• Taxes
• Liquidity

Make sure you cover other important factors that might be unique. For example, if you have foreign assets, you would want to factor in the volatility of currency exchange. 

Assets vs. Liabilities

What is an asset compared to a liability? Net worth is calculated by subtracting the values of your liabilities from your assets. The difference between assets and liabilities may seem clear. However, some details make telling the two apart more difficult.

Assets are holdings that have great value or will generate future economic health. Liabilities are the debt a person or company owes on past transactions. These debts are counted against your credit. They include loans, bonds, mortgages, credit card debt and pending accounts payable.

The time of transaction is a differentiating factor between assets and liabilities. A standing contract to pay for future services is considered to be a current asset. But payments for something purchased in the past are considered current liabilities. That’s why rent on a house is an asset, but a mortgage is a liability.

Never Forget Your Most Valuable Asset: Knowledge

Keeping close tabs on your portfolio involves knowing your assets’ value. It’s impossible to evaluate your portfolio, plan your finances or manage tax and legal responsibilities otherwise. But with careful consideration, you may even find that your assets are more valuable than you realize.

Frequently Asked Questions