A concise guide to the classification of business assets
There are many types of assets in a business or organisation. Understanding asset classification is a key part of understanding financial statements.
In our concise guide to business assets, we look at the classification of assets to help make things clearer to understand.
What are main types of business assets?
Assets are the items owned or controlled by the business that help to generate income. Current types of assets include current, non-current, physical, intangible, operating, and non-operating.
Correctly identifying and classifying the types of assets in a business is vital to the survival of a business, its solvency and its associated risks.
These can include:
• Cash
• Accounts receivable
• PPE (property, plant and equipment)
• IT Hardware (computers, printers, servers, monitors and TVs)
• Machinery (for manufacture)
• Vehicles (such as company cars and HGVs)
• Furniture
• Inventory
• Investments
• Patents (intangible asset)
Understanding the properties of an asset
Assets have three main properties, as follows:
1. Ownership – Assets are owned and can be turned into cash, or cash equivalents. 2. Economic value – Assets have economic value and can be sold or exchanged. 3. Resource – Assets are resources that can be used to generate income.
Understanding asset classification
Assets are typically classified in three ways:
1. Convertibility – How easy the asset is to convert to cash.
2. Physical existence – Is it a tangible asset (physically exists) or an in-tangible asset? 3. Usage – What the asset’s business purpose is.
Let’s look at each of these in more detail.
1. Convertibility
Assets are classified as current assets or fixed assets if they are based on their convertibility to cash. These are also referred to as short-term vs long-term assets.
Examples of current assets (that can be easily converted into cash) includes: cash and cash equivalents, short-term deposits, accounts receivables, inventory, office supplies, and marketable securities e.g. common stocks and shares.
Examples of non-current assets (that cannot be easily converted into cash) includes: equipment and machinery, patents and trademarks.
2. Physical existence
Assets which are based on their physical existence are classified as either tangible assets or intangible assets.
Examples of tangible assets includes: equipment and machinery, land and properties, cash, office supplies, inventory, and marketable securities.
Examples of intangible assets includes: patents, copyright, brand, goodwill*, licences, corporate intellectual property.
*Goodwill comes into play when a company is looking to acquire another company and typically includes a company’s good reputation, a solid and loyal customer base, brand identity and recognition, a talented workforce, and proprietary technology.
3. Usage
Assets are either classified as operating assets or non-operating assets, if they are based on their usage.
Examples of operating assets includes: cash, accounts receivable, inventory, buildings, equipment and machinery, patents and copyrights, goodwill.
Examples of non-operating assets includes: short-term investments, marketable securities, vacant land, interest income from a fixed deposit.
As can be seen from these three classifications, there are some crossovers of assets, which is why it is important to fully understand your assets and their value to your business.