Asset facts for kids

An asset is something valuable that a person or a business owns or controls. Think of it as anything that can help make money or has future value. This could be something you can touch, like a building, or something you can't, like a good idea or a brand name. Assets can be turned into cash, and cash itself is also an asset! Businesses keep track of all their assets on a report called a balance sheet. This report shows the total value of everything they own.

What Makes Something an Asset?

For something to be called an asset in business, it needs to have two main features:

• It must be something you currently have a right to.
• This right must have the potential to bring you money or other benefits in the future.

This means you can use the asset to gain something valuable, and you can also stop others from using it. For example, if a company leases a building, they don't own it, but they control its use and get benefits from it. So, it's an asset for them. However, employees are not considered assets, even though they help a company make money. This is because a company cannot "control" an employee in the same way it controls a building or a machine.

How Businesses Use Assets

Even if a business doesn't legally own something, it can still be an asset if the business controls it and gets benefits from it. The key is being able to use the asset and stop others from using it.

Businesses use a simple math formula called the accounting equation to understand their financial health. It shows how assets are connected to what a business owes (called liabilities) and what the owners have put in (called equity):

• Assets = Liabilities + Equity

This means everything a business owns (assets) is paid for either by money it owes (liabilities) or by money from its owners (equity).

All assets are listed on a company's balance sheet. They are usually grouped into two main types:

• Current assets: Things that can be turned into cash or used up within one year.
• Non-current assets: Things that a business plans to keep and use for more than one year. These are also called fixed assets or long-lived assets.

Current Assets

Current assets are things a business owns that can be quickly turned into cash or used up within about a year. They are important for a business's daily operations. Here are some examples:

• Cash and cash equivalents: This is the most "liquid" asset, meaning it's already cash or can be easily turned into cash. It includes money in the bank, actual cash, and things like checks.
• Short-term investments: These are investments a company buys and plans to sell soon to make a quick profit.
• Receivables: This is money that customers owe the business for goods or services they've already received. Think of it as an IOU.
• Inventory: These are the products a business has on hand to sell, like clothes in a store or parts in a factory.
• Prepaid expenses: These are expenses a business pays for in advance, like insurance for the next year or office supplies that haven't been used yet.

When you subtract a business's short-term debts (current liabilities) from its current assets, you get its working capital. This shows how much money a business has to run its daily activities.

Long-Term Investments

These are investments a business plans to hold onto for many years, not just for a short time. They are not meant to be sold quickly. Examples include:

• Investments in other companies' bonds or stocks.
• Land or buildings that the business owns but isn't currently using for its main operations, perhaps holding them to sell later.
• Money put into special funds, like those saved for future projects or employee pensions.

Fixed Assets

Fixed assets are things a business buys to use for a long time (more than a year) to help it make money. They are also known as Property, Plant, and Equipment (PP&E). These include:

• Land
• Buildings
• Machinery
• Furniture
• Tools
• IT equipment, like computers and laptops

Most fixed assets, except land, lose value over time as they get older or wear out. This loss in value is called depreciation. Businesses spread out the cost of these assets over their useful life by accounting for depreciation each year.

Asset-Heavy vs. Asset-Light Companies

Businesses can be described as "asset-heavy" or "asset-light" depending on how many physical assets they own.

• Asset-heavy companies invest a lot of money in things like factories, machines, and buildings. Examples include companies that make products (manufacturing), hospitals (medical), or engineering firms.
• Asset-light companies operate with very few or no physical assets. They often use technology to connect people or services. Think of companies like AirBNB (which doesn't own hotels) or Uber (which doesn't own cars). They use other people's assets to run their business.

Intangible Assets

Intangible assets are valuable things a business owns that you can't touch or see physically. They are often ideas, rights, or good reputations. It can be tricky to figure out their exact value. Examples include:

• Patents: Legal rights that protect new inventions.
• Copyrights: Legal rights that protect original works like books, music, or software.
• Franchises and licenses: Rights to use a company's name or sell its products.
• Goodwill: This is the value of a company's good reputation, strong customer relationships, and brand name.
• Trademarks and trade names: Symbols, words, or names that identify a company's products or services.

The cost of most intangible assets (except goodwill) is spread out over their useful life, similar to how physical assets are depreciated.

Tangible Assets

Tangible assets are things you can physically touch and see. They have a real, physical form. Examples include:

• Money
• Buildings and real estate
• Vehicles
• Products on hand
• Machinery and tools
• Art collections
• Precious metals like gold

Just like fixed assets, many tangible assets wear out or lose value over time. This process is called depreciation. Businesses use depreciation to spread out the cost of these assets over the years they are used. Some people also collect valuable tangible items like art, stamps, or rare books as part of their personal assets.

Wasting Assets

A wasting asset is something valuable that naturally loses its value over time and cannot be replaced. Think of it like a resource that gets used up.

• Examples include minerals from a mine or oil from a well. Once they are extracted, they are gone.
• Even things like vehicles and machinery can be seen as wasting assets because they wear out and become less valuable with use.

The loss in value of a wasting asset is also accounted for using depreciation or a similar method.

See also

In Spanish: Activo (contabilidad) para niños

• Assets under management
• Balance sheet
• Liabilities
• Equity