Asset | Definition/a·suht/
an asset is anything of value and can be converted into cash; something that a corporation or a person owns; used to help generate income and increase the level of wealth.
Next word Dividend Reinvestment Plan (DRIP) | Definition ᐳ
There are six types of assets which are current assets, fixed assets, tangible assets, intangible assets, operating assets, and non-operating assets.
An asset is anything that an individual or company owns which either provides value now (i.e., it makes money, like a deep fryer for a fast food joint), will provide value in the future (e.g., a stock that will increase in value over time), or holds value (e.g., cold hard cash). A simpler way to think about it is if it has a plus sign next to it when you’re doing accounting, then it is an asset.
Assets and Liabilities
Assets can be owned by individuals and companies. Let’s look at individual assets first. In a household, you have things that add value to your household, called assets, and things that take away value, called liabilities. The most common example of an asset for households is having money in the bank. The most common example of liability for households is credit card debt.
Think of it this way. If you sold every last thing you owed and paid off every last debt you could, would you have money left over, or would you still owe money? If you would have money left over, then you have more assets than liabilities; this is called having a positive net worth. For example, if you own a home and it is worth $200,000, but you only owe $100,000, you have a positive net worth of $100,000. That’s because you have an asset that is worth $200,000 and a liability that is worth $100,000.
Usually, people just think of either having money or having debt, but this is the same concept as having assets and liabilities. Businesses, on the other hand, think in terms of assets and liabilities.
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The Company’s Balance Sheet
A business or corporation does accounting with something called a balance sheet. On one side, they will have a list of all of their assets (what they own), and on the other side, they will list all their liabilities (what they owe). This matters because if a business consistently owes more than they own, it will go out of business. By thinking like a business, you can maximize your assets over time instead of staying in debt.
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The Money Wrap-Up: How Assets Can Grow Your Wealth
Owning assets is the only way to grow your wealth. Assets hold economic value, so you can’t become wealthier without them. To grow your wealth with assets, however, you must understand the three types of assets. An asset that holds value, like cash, is great for transactions but does very little to grow your wealth over the long term. Stockpiling cash, then, won’t grow your wealth fast enough.
Assets that provide value now, also known as cash-flowing assets, are great for the flexibility they provide. When you have cash coming into your pocket, it is available when you need it. The best way to grow your wealth with cash-flowing assets is to reinvest the cash flow into more assets.
Finally, some assets increase in value. These assets grow in equity. Equity is a great way to grow wealth over the long term if you can be patient. Understanding this about assets will let you use the right types of assets in the right situation.