What is an asset in business?
Every business has its financial aspect that greatly determines its success and growth, and one thing that enhances the financial aspect of a business is its assets.
So, what is an asset in business, how does it affect a business, and how can you acquire them?
If you want to know the answers to these questions and get more knowledge on what assets are in business, ensure that you follow through with this discussion.
We will share enlightening information about this topic.
What Is Business Asset? – What Is an Asset in Business
Assets in business or business assets are referred to as “property” by the IRS.
They are the things of value to an organization that facilitate the improvement of the organization’s efficiency, productivity, and revenue.
Business assets can come in different types.
They can be cash, buildings, lands, machinery, furniture, and other things that help you run your business.
In a nutshell, you need to own assets to run a successful business.
Categories of Business Assets
Business assets are not one specific thing.
Rather, they are different things that are categorized under the following:
Tangible Assets
These are assets that have a specific monetary value.
Specifically, they can be bought or sold to enhance a business’s financial stability.
The following are tangible assets:
- Land
- Cash reserves
- Rental Facilities
- Office furniture
- Inventory
- Production equipment
- Company vehicles
Intangible Assets
Intangible assets do not have any specific monetary value.
That is to say; they are non-material financial possessions that can help increase companies’ revenue.
So, getting the specific monetary value tends to be quite complicated as it often involves estimating the value they can provide a company.
Companies cannot sell their intangible assets as they do tangible assets because they have no fixed value.
The following are intangible assets:
- Customer goodwill
- Company slogans
- Employee expertise
- Lastly, Product designs or trademarked process
Current/Short-term Assets
Current assets are those that an organization can convert into revenue during the closing phase of a current financial year.
Or they can provide monetary benefits such as an electric pre-paid bill within one financial year.
Current assets can be non-tangible or tangible, depending on the time they will take to turn into revenue.
They are also referred to as “short-term assets” because they have a short period (often a year) to be of value to a company.
This means that these categories of assets’ value can depreciate by the closing stage of a financial year.
As a result, business leadership often prioritizes utilizing them to achieve their business goals or sell them off.
The following are current assets:
- Cash
- Pre-paid bills
- Raw materials
- Credit with suppliers
- Customers’ debts
- Commercial inventory.
Non-current/Long-term Assets – What Is an Asset in Business
Non-current assets do not necessarily have to turn into revenue within a financial year but provide significant financial benefits to a company in the long run.
As a result, they are also referred to as fixed or long-term assets.
Some of these assets, such as property and production equipment, are utilized in companies’ revenue-making activities.
A company can decide to sell its noncurrent asset when it needs capital.
However, the process often takes longer than commercial goods sales.
Some noncurrent assets, such as an inherited or bought customer base, often don’t have a particular monetary value.
Some examples of non-currents assets are:
- Patents
- Property
- Brand logos and slogans
- Production equipment
How to Acquire Business Assets – What Is an Asset in Business
Business assets can be bought and sold.
However, before selling any asset, you should own them.
Acquiring business assets should be the first thing you consider when owning and trading assets.
So, how do you acquire business assets?
Here are the two main ways to acquire business assets:
Outrightly Buy – What Is an Asset in Business
You can acquire business assets by outrightly buying with the capital you have.
However, you ensure that you don’t exceed your financial budget.
In other words, avoid using your capital (funds) to acquire assets that will hurt your cash flow.
Lease or Hire Purchase – What Is an Asset in Business
If you are not outrightly buying a business asset but want to acquire it, you can decide to lease or get them on hire purchase.
For leasing, you might not own the asset.
However, in some cases, the lease agreement will allow you to purchase the item when the arrangement ends.
Nonetheless, leasing allows you to update your tools and equipment without bearing the expense of purchasing newer models.
Meanwhile, with a hire purchase, you own the asset when you finish the payment.
With hire purchases, the interest rate will likely be less than overdrafts and bank loans often needed when you outright buy assets.
Also, from the initial stage of your hire purchase contract, you can claim a capital allowance to reduce your tax.
When you pay for your assets with hire purchase or lease equipment, you can use the assets for a set timeframe while you make the regular payment.
Moreover, you get to pick the equipment you desire or require while the company you are using buys it for you to use
There is no specific period to acquire new assets in business.
So, you can get new assets anytime during your business operations.
However, you should ensure that you watch your finance.
This is because engaging in large investments when your finances are not strong can harm your cash flow.
How to Record Your Business Assets on Your Balance Sheets – What Is an Asset in Business
Once you have acquired your business assets, you can trade and use them for your business.
However, it does not stop there.
You also need to record your business assets on your balance sheets in an acceptable way that adheres to accounting practices.
Big firms and organizations often have their accounting staff and department handle this role.
However, as a small business owner, you may not have the financial capacity to hire a separate accounting team.
So, here is a guide that will teach you how to record your business assets on your business’s balance sheets:
Draft a List of Your Business’ Assets – What Is an Asset in Business
The first thing you are to do is to draft a list of your assets.
This includes both your intangible and tangible assets.
You might not know all the assets you have.
So, check with your staff to identify the assets you may have missed.
Here is what the list can look like:
Assets:
- Copyright
- Inventory
- Accounts receivable
- Customer relationships
- Domain name
- Brand
- Computers
- Cash
- Intellectual-property
- Desks
- Patent
- Chairs
- Cell phones
- Copier
- Pre-paid expenses
- Manufacturing equipment
- Transport vehicles
Categorize them Into Noncurrent and Current Assets
The next thing to do is to categorize them into two different groups.
Tangible and intangible assets can either be current or noncurrent assets.
So, you need to place assets that provide revenue within a financial year into the current assets group.
Ensure you place assets that will not provide value to your business within one year and more into the noncurrent assets group.
For Instance:
Current assets:
- Short-term investments
- Account receivable
- Inventory
- Pre-paid expenses
- Cash
Noncurrent assets:
- Patent
- Copyright
- Domain name
- Brand
- Customer relationships
- Desks
- Computers
- Cell phones
- Chairs
- Copier
- Transport vehicles
- Manufacturing equipment
Add the Value of All Your Assets Together – What Is an Asset in Business
After categorizing your assets, add the total value of all your assets together.
Before you can do this, you need to know the specific value of your assets.
For those assets that don’t have a specified value, consult your previous financial reports and statement to get an idea of what it is.
Alternatively, you can speak with a financial consultant to find out about it.
Ensuring you get the accurate value of your entire asset when you add their value together determines the amount of money available to settle their liabilities.
So, you need to ensure that you are meticulous when making your calculations.
For instance, let’s assume that it was assessed that your company has current assets worth $300,000, and for noncurrent assets, you have $2,000,000.
What you should do is add both of them together in this method:
Total assets = current assets + noncurrent assets
Total assets = $300,000 + $2000,000 = $2,300,000
Check the Accuracy of Your Work
To ensure that you get the correct total amount of your assets, you should use this formula to confirm:
Total liabilities + equity = total assets
Now, total liabilities are the amount an organization or company presently owes.
Meanwhile, equity is the company’s capital or net worth.
Your calculations are accurate if your business equity and total liabilities are added and give the same amount as your total assets.
For instance, let’s assume you calculated and entered your total asset worth as $2,300,000.
Now, to determine if your result is correct, you need to determine your company’s total liabilities and current net worth before calculating.
Getting the accurate amount of your total liabilities and equity will determine the accuracy of your work.
This is like a second step of determining your asset total amount.
So, you need to get the right amount of both carefully.
Once you have determined them, you can go ahead with your calculation.
For example: From the earlier example, let’s assume your business liabilities have $1, 150,000, and its current net worth is $1,150,000; it would calculate like this:
Total liabilities + equity = total assets
1,150,000 + 1,150,000 = $2,300,000
Thus, if your total assets equal the total sum of equity and liabilities, then you have correctly entered your asset information.
Financial Techniques Used To Promote Effective Utilization of Business Assets – What Is an Asset in Business
Asset adds value to businesses.
However, assets can be less valuable to a business when not effectively utilized.
So, to ensure that this doesn’t happen, two financial techniques were developed, and they are:
Depreciation – What Is an Asset in Business
This is the technique used by business experts to measure the amount of value a business asset loses over time.
It is typically used to measure tangible and noncurrent assets’ projected worth, determine the best time to sell or replace them, and maximize profit.
For instance, let’s assume you acquired a new copier worth $5,500 with a warranty guaranteeing five years of free repairs.
After conducting product research, your company’s operations director estimated the copier’s worth to be $1,000 when the warranty period is over.
Now, to find out the overall revenue amount that you can generate from the copier after using it for the warranty period and selling it after that period, you can make use of the depreciation formula:
Depreciation = Original cost – resale value/ useful life
Depreciation = 5,500- 1,000 / 5 = 900
Following the calculation, you can make $900 in revenue when you sell the copier at its lifecycle end.
Amortization – What Is an Asset in Business
While depreciation focuses on tangible, noncurrent assets to measure their value over their useful life, amortization focuses on intangible, current assets.
The amortization technique works by dividing the value of intangible, current assets over their useful life.
It aims to reduce the value of intangible assets over a given period.
These benefits businesses with loans and helps measure revenues generated from their patents, copyright privileges, customer satisfaction, or employee morale.
Companies’ financial and accounting teams often provide amortization information on their annual reports.
For instance, let’s assume that you create a marketing department and hire 10 personnel to meet the present marketing needs of your company.
Now, if you want to measure the value of the new marketing team of five years, you would most likely use the amortization formula.
For example, if your company spent $800,000 for enlisting, team-building, and salary of the team and predicted that they could yield a profit of $400,000, then the calculation would be:
Amortization = Original cost – Residual value / useful life
Therefore, amortization = 800,000 – 400,000 / 5
Amortization = 400,000 / 5 = 80,000
After the calculation, the $80,000 would be the amount you would report for your amortization expenses yearly.
How to Value Business Assets – What Is an Asset in Business
Business assets are not just acquired, owned, and used effectively in adding value to a business.
They are also sold off and sometimes loaned out.
When this is to occur, business assets undergo valuation.
This provides an idea of assets worth (amount of money) that they can be sold for.
However, just as assets are of different types and categories, they are also valued differently.
The following are some of the ways assets are valued:
Appraisal – What Is an Asset in Business
Some assets are valued by specialists known as appraisers.
They do research and work with their knowledge to appraise the value of an asset to use them as collaterals or to help with depreciation deductions.
Assets like stock, jewellery, buildings, and artwork are examples of assets that can be appraised.
Fair Market Value
Fair market value is the most common method for determining the value of individual assets.
With this method, the value of an asset is the price that is brought between a willing seller and a willing buyer.
Both parties know the asset’s value well and are not compelled to sell or buy.
Liquidation – What Is an Asset in Business
This method is used when you want to get cash from assets due to bankruptcy.
So, when using the liquidation method, the value of assets is seen as cash value.
The value obtained after a liquidation valuation is often less than fair market value.
This is because the sellers are often forced or compelled to sell.
Disaster
When disaster happens, it is mandatory for you to value your business assets immediately.
This is because IRS has specific rules set for claiming assets that have undergone a disaster.
Obsolescence – What Is an Asset in Business
The value of business assets can change because of obsolescence or age.
When assets are obsolete, then they are no longer useful.
Assets and Tax Purposes – What Is an Asset in Business
The IRS refers to assets as “property” and distinguishes them into types based on if they can be depreciated or expensed.
Expending assets means taking the tax-deductible from them the year after buying them.
Low-cost fixed assets and current assets’ costs are generally expensed.
For example, assets like a cell phone can have their entire cost deducted in their first year of use.
On the other hand, depreciation is the annual deduction from a business’s taxes to recover the asset cost during its useful life.
Listed Property
This is considered a special sort of business asset because you can use it for business and personal purposes.
As a result, the IRS monitors them closely.
Some examples are passenger autos and properties used for recreation, entertainment, and amusement.
How to Maintain Business Assets – What Is an Asset in Business
Maintaining business assets involves keeping them in good condition, extending their lifespan, and maximising their value.
Here are a few ways to do so:
- Regular maintenance
- Proper storage
- Upgrades
- Replacement planning
- Insurance coverage
- Inventory management
- Employee training
- Documentation
Conclusion on What Is an Asset in Business
Every business needs assets to operate.
Assets help businesses to perform different operations while adding value.
A business that has more liabilities than assets often end up failing.
Also, mismanagement of assets can lead to financial issues in business.
Therefore, you need to have a good knowledge of what an asset is in business.
This article shares information about business assets.
So, make good use of it.
