When you're speaking with an accountant or bookkeeper, you probably hear the words "assets", "liabilities", "revenue" and "expenses" quite a bit. Although commonly used, unless you have accounting experience, you might not know exactly what these words mean in terms of your business. With you in mind, we've put together a simple guide to help!
What is an Asset?
An asset is anything you own that has value and can be converted into cash. Assets can be small and worth only a little, like a laptop or a desk, or huge and valuable like an office building or equipment. Cash, investments, real estate and personal property are all considered assets, as are inventory, office equipment, supplies and even any patents or business licenses you may hold.
Assets may be put into different categories based on their attributes, but will always have value that can be converted into cash. Let's take a look at some of the different types of assets!
Liquid vs Illiquid Assets
Assets that can converted into cash quickly without affecting their worth are called liquid assets. Alternatively, an illiquid asset will lose value if converted quickly. A liquid asset could be actual cash, stocks, government bonds, certificates of deposit or mutual funds while an illiquid asset might be a house, antique, car or even something as simple as a rare bottle of wine.
Current vs Fixed Assets
Current assets are converted to cash, usually within a year, to assist your company financially by paying off debts or supporting day-to-day operations. Also known as short-term assets, these items are listed on your balance sheet first and in order of liquidity. Cash is first, followed by temporary investments, accounts receivable, inventory, supplies and any prepaid expenses.
Fixed assets are long-term assets that support the operations of your company and won't be sold. These assets are useful over many years and usually depreciate. Listed on your balance sheet as "plant, property and equipment", a fixed asset can be machinery, equipment, vehicles or property. Fixed assets are also tangible assets.
Tangible vs. Intangible Assets
An asset that has a clear value-even though that value may decrease over time-is a tangible asset. When you're looking at a list of your assets, if you can easily assign an item a realistic value, you most likely have a tangible asset. An asset that has a long-term physical existence like the property, equipment and inventory we talked about above is always a tangible asset while non-physical items like patents and licenses are intangible assets. When you consider the overall worth of your business, the relationships you've built, the intellectual property you've developed and the brand reputation you've established are all valuable, but intangible. Putting a price on these assets can be difficult, because their value isn't obvious and can increase over time. But intangible assets can ultimately prove to worth far more than a tangible asset.
Acquiring and growing the assets you have is important, but understanding your assets and how to best to use them to benefit your company, is essential for a strong business foundation!