The term “assets” refers to things owned by people or entities that have, or are expected to have, economic value. Assets can come in many forms including cash, bank accounts, investments, collectible items, personal possessions, and real property. The value of an individual’s or entity’s assets is offset by the amount of their debts, and comes into play when seeking financing for something, or when the individual dies. To explore this concept, consider the following assets definition.
Definition of Assets
- Anything owned by a person or entity that has, or is expected to have value.
- Items owned that might be converted into cash.
- The total resources of a person or entity, such as cash, securities, accounts receivable, inventory, machinery, fixtures, or real property.
1525-1535 Old French asez (“to have enough”)
What are Assets
In simple terms, assets are a person’s or entity’s valuable possessions. Possessions considered as assets are not always material in nature, but may include investments, patents, and other types of transactions that may have value. Businesses are usually valuated for sale, or for the purpose of obtaining a loan, based on their net worth. The issue of assets also comes into play when an individual dies, leaving his assets to certain beneficiaries through a will, or when the probate court determines how his assets are to be distributed. Most commonly, however, assets are viewed as possessions that can be turned into cash.
Liquid assets are items or transactions that can quickly be converted into cash, if needed, with a minimal impact to the asset’s total value. Liquid assets are generally viewed in the same light as cash, since their value remains substantially the same when sold on the market. In order for an asset to be considered a liquid asset, it must be established on the market, having a large enough base of buyers and sellers to absorb the sale without affecting the asset’s market price.
Some examples of liquid assets include:
- Government bonds
- Money market account
- Money in a checking or savings account
- Trust funds
- Tax refunds
- Certificates of deposit
- Court settlements
Because liquid assets are items that can quickly be turned into cash, such items as real property, jewelry, collectibles, and cars are not considered to be liquid. This is because it would take time to sell these items, and the value often fluctuates, leaving the possibility of taking a loss if sold in a hurry. For example, if Chris sells his extensive collection of baseball cards on line for quick cash, it is likely that he will receive far less than the true value of the cards.
Tangible assets are things that have material value and are physical in nature. Tangible assets are things that can be seen and touched, and for which the market value can be readily determined. Tangible assets carry the risk of becoming lost or damaged due to accidents, theft, or acts of nature, decreasing or nullifying their value. Examples of this type of asset include real estate, buildings, vehicles, equipment, inventory, precious metals, and even currencies. Tangible assets can be broken down even further into fixed or current tangible assets.
Fixed assets are items owned by an individual or business that will not be sold or consumed within the next year. Fixed assets are generally used to produce income for the individual or entity, making them a necessary part of the income strategy. Some examples of fixed assets include real property, buildings, machinery, and computers.
Current assets are items owned by an individual or business that are expected to be consumed or sold within 12 months. Current assets may be sold or liquidated for cash to pay bills if necessary. Current assets include such items as vehicles, office equipment and supplies, inventory, collectibles, and checking or savings accounts.
Intangible assets are things that are not physical in nature, and are difficult to place a value on. This type of asset is seen more often in relation to businesses. Commonly, these assets are seen in terms of their respective life expectancy, each seen to have a definite or indefinite term of use. Intangible assets include such things as:
- Internet Domain Name
- Company Brand Name
- Brand Recognition
Although intangible assets cannot be seen or touched, they have value. For example, new products introduced by the Pepsi company benefit from the years spent promoting brand recognition. Although brand recognition is not something that can be seen or touched, the Pepsi company would not be nearly as valuable without this company and brand name recognition.
Assets and Liabilities
Assets and liabilities refers to the total of what people own, and what they owe. An individual’s or entity’s net worth is the total amount of the assets owned, minus the total amount of debts incurred. Because assets and liabilities are constantly changing, net worth too is in constant flux, as bills are paid, and new purchases are made. Determining a person’s or entity’s net worth or value, begins by listing all of their assets, including money owed to them, or accounts receivable. Next all of the debts are listed, including accounts payable, and outstanding loans or liens are subtracted from the total assets. The resulting number is the net worth or value of the person or entity.
Common assets and liabilities include:
|Assets (Resources)||Liabilities (Debts)|
|Equipment||Lease Payments or Lease Termination Fees|
|Inventory||Credit Card Debt|
The formula for determining net worth is:
Net Worth = Assets – Liabilities
Related Legal Terms and Issues
- Beneficiary – A person named in a will or trust as the intended recipient of assets or property.
- Probate Court – The section of the judicial system that deals with matters relating to wills, trusts, estates, guardianships, and conservatorships.
- Real Property – Land and property attached or fixed directly to the land, including buildings and structures.