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.
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There are four main types of assets: current, fixed, tangible, and intangible, all of which are used in everyday life but have different characteristics and classifications.
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When starting to invest, looking over financial statements is crucial. Companies that are publicly traded on the United States stock market are required to disclose their financial information. In the beginning, it can be challenging to understand some of the terms used by corporations on their financial statements, but in reality, they are simple and can be seen in everyday life. One of the essential parts of financial statements is emphasized in the asset section of the balance sheet.
What is an Asset?
An asset, which comes in many forms, is something that a person or a corporation has owned for a short or long time. An asset’s form is simply the way people or corporations classify them. Below we discuss different types of assets and some of the most common examples of each, which can be seen on nearly all financial statements.
Four Main Types of Assets
A current asset is classified as one that will be used within one year. The most common current asset seen in everyday life is cash. Cash and cash equivalents are typically used to pay for everyday services or items in the present or short-term future.
For a corporation, current assets include those that can quickly convert into cash. For example, if a corporation declares bankruptcy, it no longer creates a profit to remain in business. If this occurs, the corporation would need to sell its current assets to quickly gain access to cash and pay off all of its short-term debts.
One example is accounts receivable, which is the money owed by customers for services done by the corporation. Another example is cash equivalents, which are marketable securities that have been invested in by the firm. And lastly, prepaid expenses, which are expenses that are paid for in advance, such as rent and insurance.
Fixed assets, also known as long-term assets, are used for an extended period. In everyday life, fixed assets could be a car or a house that has been completely paid off. They could also be the stocks or investment holdings, such as real estate and bonds, that one holds long term to provide passive income.
For a corporation, fixed assets are the items that help them maintain and improve its revenue levels. Typically, on the balance sheet, these items are labeled as property, plant, and equipment. This account bundles all of the long-term assets owned by the corporation into one category to save space on the balance sheet for the rest of the items.
Tangible assets represent those that have physical substance. For example, a car, a house, or a check to be cashed are all tangible assets as they have a physical component. For the most part, most items recorded on the balance sheet are substantial, but there are a couple of exceptions called intangible assets.
An intangible asset is the opposite of a tangible asset because it lacks physical substance. So, for example, a company like Nike, whose iconic slogan is "Just Do It," would file for trademarks and copyrights to prevent other corporations from using their designs or catchphrases, which undercuts their prices.
Copyright is when a company files to protect its original work, preventing others from profiting off of it. As Nike’s products are mainly designed for athletes and comfortable wear, copyrighting their work also protects the time and money spent on research and development. This is because competitors or knock-off companies could produce similar products at a fraction of the price, causing them to go out of business.
Furthermore, a trademark is when a company files for items that distinguish them from its competitors. For example, in the case of Nike, their swoosh logo is trademarked to prevent others from using it or something similar.
Like most things in life, it is essential to make an educated decision when investing. If done blindly, it could result in little to no return. Therefore, better and informed decisions can be made regarding long-term investments by using this newly gained knowledge.