Assets in Business Accounting: Types & Determining Value

What are assets in a business?

Assets are resources owned by an individual or a corporation that can be converted into cash or could generate cash flow in the future. Examples of personal assets include homes, cars, art, property and investments like bonds, pensions and retirement plans. A person’s net worth is calculated by subtracting their liabilities (everything they owe) from their assets (everything they own).

Business assets include anything the business owns that has positive economic value and could sustain production and growth. A company lists its assets on a balance sheet, which details the business’s worth, how it is financed and how well it manages its resources.

Examples of assets

The most common assets companies list on their balance sheets include the following: 

• Cash
• Investments
• Accounts receivable
• Inventory
• Prepaid expenses
• Property
• Buildings
• Equipment
• Furniture
• Vehicles
• Company devices

Calculating total asset value can help determine a company’s net worth. Businesses must classify assets to determine the business’s value and financial health.

“Having this type of real-time information at their disposal, such as cash and inventory, is incredibly beneficial to business owners,” noted Alberto Ortiz, president of ATAX Franchise. “Classifying short-term assets such as cash, accounts receivable and inventory provides a snapshot of where a business owner’s resources are invested for operations.”

Ideally, a company’s assets should be balanced to accommodate short-term and long-term business needs. “Think of it as a tripod: Too much allocation in one area can unbalance a business’s financial position,” Ortiz explained. “For example, having a high accounts receivable outstanding balance could indicate a business has less cash available to fund upcoming inventory, reducing sales or forcing a business owner to borrow for upcoming purchases inadequately. The same problem can occur in reverse when having more inventory than necessary to keep up with demand can deplete cash balances.”

How do assets work?

Your financial tracking process must include tracking business assets. Understanding your assets is crucial for many financial matters. For example, when owners seek business insurance, they must identify their assets and their worth to get proper coverage.

Assets also play a role when you’re applying for a business loan; lenders consider the value of your assets when determining loan approvals and amounts. They may also use certain assets as collateral, depending on the loan’s amount.

Every asset has three key properties that help determine its value:

• Ownership: Assets that represent ownership can be converted into cash and cash equivalents.
• Economic value: Assets with economic value can be sold or exchanged.
• Resource: These assets can be used to create future financial benefits.

What are the different types of business assets?

When a finance team determines an asset’s value, they can classify it in three ways:

• Convertibility
• Physical existence
• Usage

Convertibility: Current and fixed assets

Current and fixed assets can easily be converted into cash or cash equivalents.

“Healthy cash flow is critical for any business, and all owners must keep an eye on cash,” advised Stacy Burrell, vice president of finance at Consero Global. “Because assets are the business, cash obviously sits on top of the list of all assets, which are ordered by how easily they can be converted to cash.”

A current asset can be converted into cash within one financial year or operating cycle. These assets are used to facilitate day-to-day operational expenses and investments. They include (but are not limited to):

• Cash
• Market securities
• Accounts receivable
• Inventory

“Accounts receivable and inventory are current assets as they can easily be converted to cash,” Burrell explained. “Inventory refers to assets that are ready to be sold or converted into a finished product to be sold.”

Current assets typically are expected to be liquidated within one year or operating cycle or converted into fixed assets. Fixed assets have a life of more than one year. Typically, they include property, equipment, vehicles and furniture. Fixed assets cannot be converted to cash or meet short-term operational demands or expenses easily.

Physical existence: Tangible and intangible assets

When assets are categorized by their physical existence, they are considered either tangible or intangible:

• Tangible assets: Tangible assets exist in a physical form; they can include cash, investments, land, buildings, property, inventory, vehicles and many other valuables. Many current and fixed assets fall into this category.
• Intangible assets: Intangible assets do not exist in any physical form; their value is not easily determined. They can include a brand name, a dictation network, patents, processes, corporate methodology and business copyrights.

Usage: Operating and nonoperating

Assets that are categorized by their usage can be considered operating or nonoperating: 

• Operating assets: An organization uses operating assets in its day-to-day operations. They include cash, stock, buildings, inventory, equipment, machines, copyrights and patents.
• Nonoperating assets: Nonoperating assets generate revenue but are not required for business operations. Nonoperating assets include short-term investments, vacant property and interest income.

How do you determine the value of your assets?

Asset valuation is incredibly important for a corporation’s financial success, especially in the event of a company merger, loan application, audit or asset sale.   

Businesses should start by listing their assets on a balance sheet. From there, they can add up their assets and use the basic accounting formula to determine their net worth. A professional appraiser must determine larger businesses’ assets.

There are four methods of determining an asset’s value: 

• Cost method: The cost method appraises an asset based on its original price. However, because of market and depreciation changes, businesses don’t always get the most accurate results.
• Market value method: The market value method determines an asset’s value based on the price it would sell for on the open market.
• Base stock method: The base stock method has the company keep a certain stock level; the value is assessed based on the base stock. Not every type of asset can be determined through this method.
• Standard cost method: The standard cost method uses expected costs, not actual costs, to appraise an asset. The company bases the expected cost on its experience with the asset and estimates what it will be worth in the future. To determine these costs, a business records the differences between expected and actual costs. Because actual costs often differ from expected costs, these differences are known as variances. Favorable variances are when actual costs are less than expected costs; unfavorable or negative variances occur when actual costs exceed expected costs. Variances can affect the company’s valuation and large, recurring variances should be investigated.

Understanding how to value your business’s assets properly is critical to understanding its overall financial health. Using the methods above will help you ensure a more accurate asset valuation.

Jennifer Dublino and Kimberlee Leonard contributed to this article. Source interviews were conducted for a previous version of this article.