What are Assets and How to Classify Them?
An asset is an item that you expect to acquire a benefit from in the future. If you predict that you will consume an asset entirely in the current period, you should charge it to expenditures within that period instead. A firm would total up its assets into different line items on its balance sheet. Below are some examples of assets which you will see on the balance sheet:
- Notes receivable
- Furniture and fixture
- Computer equipment
- Office equipment
- Raw materials inventory
- Work-in-progress inventory
- Finished goods inventory
There are some fixed assets that people would classify them as intangible. One will record the intangible assets on the balance sheet in a different line item. A firm may acquire or buy these items as a component of an acquisition. Some intangible assets include:
- Names of the brand
- Franchise agreements
- Royalty agreements
- Supply agreements
You may not find some assets on the balance sheet. It is because they are typically valuable processes or internally generated assets which the accounting standards would not permit a firm to acknowledge them as its assets through double entry accounting. Some non-recognized assets include the value of a brand image, internal research and development processes, as well as investments in staff training.
Classification of Asset
Asset classification is a system that assigns assets into different categories according to their common traits. Then, there will be an application of a variety of accounting rules to every group of assets in the system of asset classification so that people can account for each group properly. Usually, people will cluster these groups for reporting purposes in their balance sheet. Listed below are some common asset classifications:
- Cash. For example, cash in deposit accounts and petty cash.
- Receivables. For instance, Loans receivable from employees and trade receivables.
- Fixed Assets. For example, buildings, furniture and fixture, machinery and office equipment
- Inventory. For instance, raw materials and finished goods.
Two more comprehensive categorization of assets includes the designations of long-term assets and current assets. These classifications are strictly time-based. Current assets refer to all assets which you will use in a year which form part of the component of working capital, whereas long-term assets refer to all assets that you will use in more than a year.
As an instance of the application of accounting rules to the assets in the same category, you may assume all fixed assets that you classify them in the computer software group to possess the same useful life. This indicates that you may appeal the same method of depreciation to them. If you do so, you will find it easier when you account for your assets in this category.
The idea of asset classification may also implement to the various types of investments which an individual or a business holds. Some examples include real estate, bonds, collectables, as well as an equity security.
If you are unfamiliar with accounting, you may find it challenging to understand the concepts about assets. As an entrepreneur, instead of putting in time and effort in accounting, you should engage an accounting firm in Johor Bahru to help you with it so that you can focus on your core tasks.