- An asset is anything that an individual or business owns that has monetary value and can be sold for cash.
- There are four main types of assets: liquid, illiquid, tangible, and intangible.
- Knowing what your assets are and their value is the first step in calculating your net worth.
When you sit down to calculate your net worth or do a full review of your finances, the first question you're faced with is: "What are your assets?" In the broadest sense of the word, the answer is anything you own that has monetary value and can be exchanged for cash.
Understanding assets
What are assets?
Assets are owned by either individuals or companies. Whether it's a manufacturer with equipment that can be resold or a person with a high-priced jewelry collection, if it's owned and has value it's an asset.
The most important feature of assets is that they can be used as resources to generate income both today and in the future.
Importance of assets
Assets can be crucial resources for both individuals and businesses.
Accumulating assets can mean building wealth or acquiring items of value over time. When the things you own have some sort of value, you can always sell them and pocket the cash, whether you're a business or an individual. However, how individuals manage their assets differs from how companies do.
People tend to keep assets to build wealth to retire or use them as a financial resource. "An asset in the form of a dividend stock earns ongoing income for its owner and could be sold if needed, freeing up purchasing power," says Mark Berger, a CFP and account executive at Berger Financial Group.
With companies, on the other hand, assets represent items of value that can be used to promote or sustain growth in the business. This could be machinery used for manufacturing, inventory, annual sales, or receivables.
"Assets are listed on a balance sheet to show how they were accumulated," says Berger. "This helps companies keep track of what they own and can sell within a fiscal year or what can be sold in the future once its value appreciates."
When calculating your net worth, the formula is simple: assets minus liabilities. Liabilities are your debts and other financial obligations, while assets are what you own. So, for example, if you own a home worth $250,000 but owe $150,000 on your mortgage, that asset's value is $100,000.
It's important to determine the value of all your assets this way so you can use the information to calculate your net worth. Your net worth will be negative if you have more debt than assets. But it doesn't have to stay this way. What's important is knowing what your net worth is and tracking how it changes over time.
Quick tip: Knowing your net worth can be beneficial in situations such as applying for a loan or figuring out how to comfortably retire. It can also help you make decisions about managing debt and making long-term investments.
Types of assets
Liquid assets
Liquid assets can quickly and easily be converted to cash, such as bank accounts, certificates of deposit (CDs), stocks, or bonds. Liquid assets are unique in that not all your assets can be sold right now for cash without incurring a loss or fee on the sale.
Illiquid assets
These are things that take longer to convert to cash, including real estate, antiques, and collectibles. Your home would be an illiquid asset because even if you have a lot of equity, the sale could take a while, depending on the local market conditions. Further, selling a home requires many steps and significant documentation.
Current assets
Current assets are more short-term in nature. "Current assets are the category of a company's resources that are expected to be used over the course of normal business operations over the near term, less than one year into the future," says Matt Stucky, a senior portfolio manager with Northwestern Mutual Wealth Management Co.
Stucky says a company's current assets can offer a lens into how much liquidity it will have to fund its everyday operations and meet near-term financial obligations. These short-term assets could include the money a company will use to pay employees or buy supplies and the inventory it's currently selling to customers.
Whether an asset is classified as a current or noncurrent asset depends on how long the company expects it will take to turn it into cash. To qualify, assets must be used or converted within a year (or within one operating cycle if that's longer than a year).
Fixed assets
Fixed assets provide value for a longer period than current assets. A company's fixed assets may include the land, machinery, and other tangible equipment it will use to create the products and services it sells.
Mike Zeiter, a CPA/PFS and CFP who runs Zeiter Tax Services, says generally, the easiest way to determine if something is considered a fixed asset is if it will last more than one year.
For example, a toy company may buy an assembly machine that will last 20 years (a fixed asset) and use it to combine toy parts (current assets) to create the toys it sells.
"Fixed assets" generally refers to tangible assets as opposed to intangible noncurrent assets, such as patents, trademarks, and goodwill. Fixed assets are also called noncurrent assets, long-term assets, or long-lived assets, and they're often listed under the property, plant, and equipment (PP&E) section of a company's balance sheet.
Tangible assets
Tangible assets are physical things that you own. A tangible asset could be anything from cash in your bank account to your car or home furniture. If you can physically touch and measure it, it's probably a tangible asset.
These types of assets are physical things and have a specific monetary value. Both businesses and individuals can own them. For example, a jewelry or art collection are both tangible assets a person might have. However, the concept of tangible assets most frequently appears in a business context.
Most companies evaluate two specific types of tangible assets: current and long-term. They're also called fixed or capital assets. The key differentiator between the two is how quickly the asset could be exchanged for cash. Among the most common are cash, equipment, inventory, real estate, machinery, land, and receivables.
"Your tangible assets are going to be anything to do with your transportation, your production capability, and manufacturing your service base," says Robert Smith, president and chief investment officer of Sage Advisory Services.
Intangible assets
Intangible assets are non-physical items of value. They include things such as patents, copyrights, intellectual property, internet domain names, and a company's brand. You can't physically touch them, but they have value and can be converted into cash.
There are no limits based on age, contract, or regulatory obligations. Companies tend to record intangible assets on a balance sheet but include only things that the business buys or acquires (like a patent, email list, or a solid website). The intangible asset must have a long life span and value that's clearly identifiable.
Sooner or later, a business will acquire an intangible asset, whether it's obtaining a license to operate, building the brand's name (which results in a direct increase in profit), or trademarking something. These assets can be acquired by:
- Purchasing them
- Receiving a government grant
- Creating them in-house (software or a company that performs research that leads to the creation of a product or solution)
Examples of assets
Cash and cash equivalents
Cash refers to money stored in the form of bills or coins, or alternatively, money stored in a bank account. Cash equivalents represent highly liquid securities that can easily be sold and changed into cash.
Real estate
Real estate represents assets in the form of land and any buildings attached to it. Real estate is less liquid than many other asset types, as its purchase and sale are complex and involve many different steps.
Equipment and machinery
Equipment and machinery are both examples of assets that businesses use. More specifically, they are fixed, tangible assets. Interestingly enough, these items can serve as assets, and any debt used to purchase them can represent a liability.
Patents and trademarks
Patents and trademarks are intellectual property and represent different intangible assets. Patents are granted for inventions, while trademarks are granted for designs, words, phrases, or some combination thereof that help identify a product or service.
Measuring the value of assets
Market value
The market value of an asset is what that asset would sell for in the open market at any particular point in time. For example, if you hear that a company was sold for $20 million, that tells you what its market value was at the time.
Book value
The book value of an asset can be calculated by taking that item's original cost and then subtracting depreciation. This is a method of determining an asset's value using accounting practices.
Fair value
The fair value of an asset is what it would trade for if both the buyer and the seller were able to work out a transaction price. The fair value of an item refers to what it would sell for under ordinary circumstances, meaning not the price it would fetch if sold during liquidation.
Assets in personal finance
Building personal wealth
Individuals can accumulate assets in order to build up their personal wealth. For example, they could obtain cash, cash equivalents, stocks, bonds, and real estate. To determine an individual's net worth, you take their assets and subtract their liabilities.
Diversification
The idea behind diversification is not putting all your eggs in one basket. Ideally, if one component of your portfolio falls in value, the other parts will appreciate, making up for this loss. A highly diversified portfolio could contain many different asset classes, including stocks, bonds, commodities, and real estate, for example.
Assets in business finance
Balance sheet components
The components of a balance sheet include assets, liabilities, and equity. Assets are resources the organization can use to achieve its objectives. Liabilities, on the other hand, represent obligations to other parties.
The third component of a balance sheet is the equity of shareholders, which represents the capital shareholders have invested into a particular company, along with its retained earnings.
Asset management
Asset management firms buy, hold, and sell different assets in an effort to achieve their business objectives, whether that involves generating capital appreciation or protecting capital. Such strategies can involve many different kinds of assets, including stocks, bonds, commodities, and cash equivalents.
Asset FAQs
What is the definition of assets?
Assets include anything owned by individuals and businesses that has monetary value and can be sold for cash.
What are the main types of assets?
The main types of assets are liquid, illiquid, tangible, and intangible.
Why are assets important in personal finance?
Assets are important in personal finance because individuals can use them to build wealth. This wealth can in turn be used to achieve various objectives, for example, retiring comfortably.
How are assets valued?
Assets are valued using market value, book value, or fair value, depending on the circumstances.
What is the difference between tangible and intangible assets?
Tangible items include equipment and machinery, while intangible assets include non-physical items like patents and trademarks.
