Definition
An asset is an item of economic value which is expected to generate future economic benefits for the entity holding this asset. In more simple words the things purchased and possessed by the business are called assets. Assets are the properties and possessions of the business which are acquired to obtain future benefits from their use. For an item to be called as an asset, the following three conditions should at least be met.
- The legal title of ownership
- Right to use it
- Right to sale or dispose off
Following are some examples of asset accounts
- Cash
- Short Term Investment
- Long Term Investment
- Receivables
- Prepaid Expenses
- Building
- Inventory
- Furniture and Fixture
- Machinery
- Goodwill
- Plant
The account of an asset usually have ‘debit’ balance. This means that when an asset is purchased, it is debited along with corresponding credit account. This can be understood from the following examples.
Unisa Pharma purchased a machinery of worth $ 25,000 in cash. The journal entry will be
When the machinery is purchased on account. The journal entry would be:
The period of expected economic benefits is assumed to be the useful life of a asset. It means that the life of an asset is based on the period of economic benefits which asset will generate for the entity. For example a business purchases machinery for production process and expects that this machine will run in good condition up to next ten years. This would mean that this machinery will generate economic benefits for the business up-to the ten years and the same is taken as useful life of the machinery.
Kinds of Asset Accounts
According to nature, following is a list of common asset accounts mention in chart of accounts.
Current Assets
The assets which are either cash or easily convertible into cash within period of one year are called current assets. Example includes cash, bank, short term investments, closing stocks of raw material, account receivables ect. In fact such assets are acquired or created to convert the same into cash or sell them for cash within one year.
Non-Current Assets
These are assets which are acquired with the intention to hold them for a relatively long period (more than one year) to earn profit or income from them. Long term investments, shares of other companies, fixed deposits and Government securities are the examples of non-current assets.
Fixed Assets
The moveable and immovable properties which are purchased/acquired by the business to retain and use them in the business operations are called fixed assets. Examples include land, building, plant, machinery, vehicles, office equipment, furniture, fixtures etc. The cost of these assets is charged to profit and loss account by way of deprecation which is based on expected useful lives of these assets. Deprecation is a systematic allocation of the cost of fixed assets over their useful life. Deprecation once calculated for the current period, is charged to profit and loss account as an expense. Fixed assets can further be divided into two kinds.
Free-Hold Assets
The assets which are purchased or acquired with the legal right and ownership and use.
Lease-Hold Assets
These are the fixed assets which are purchased for a specific period of time for use whereas the right of ownership does not transfer to the business at the time of purchase and remains with the original owner. For example assets acquired from leasing companies under finance lease arrangements. Despite the fact that ownership is not transferred at the time of purchase and the same is dependent upon the expiry of lease term, yet certain accounting standards recommend that assets acquired under finance leases should be recorded and displayed as assets on the face of balance sheet. This is so recommended to actually discourage the off-balance sheet financing.
Intangible Assets
The assets which are not physically exist and cannot be touched but still possessing value for the business are called intangible assets. These types of assets include trademarks, goodwill, patent rights etc.