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Definition of an Asset:

An asset provides economic value to the owner by providing an economic benefit in the future.

Detailed Explanation:

An asset is a resource that can provide economic value to the owner. For a family, cash, a home, and a car are assets that benefit them in their daily lives. Investments in financial assets such as stocks, bonds, and CDs help families accumulate wealth to provide for their future. Companies use their assets to gain an advantage in the marketplace by creating cash inflows or reducing cash outflows. Accountants list assets on the left side of a balance sheet. A company’s total assets must equal the sum of its liabilities and financial equity. 

Assets are broken into three categories:

Current assets are assets that can be converted into cash within a year. The following are examples of current assets.
  • Cash
  • Inventories
  • Marketable securities (stock, bonds, CDs)
  • Prepaid expenses
Fixed assets are long-term assets. Fixed assets are used up over a period of time. The reduction in value is the depreciation of the asset. Examples of fixed assets are:
  • Land
  • Building
  • Equipment
  • Vehicles
  • Software
  • Goodwill
Note that some assets are not reported on a balance sheet because they have not been purchased or are challenging to place a value on. For example, valuable employees are an asset to a company, particularly if the employee is difficult to replace. However, employees are not listed on a company’s balance sheet. Balance sheets do not include an internally generated customer list, but they would include a purchased list. A company works for years to build an outstanding reputation, but reputation is not listed on the balance sheet - unless the company is purchased, when it would appear as goodwill on the acquiring company’s balance sheet. For example, PepsiCo Inc. paid about a 10 percent premium when it acquired Quaker Oats Company in 2001. The added value paid was reflected as goodwill on PepsiCo’s balance sheet but never appeared on Quaker Oats Company’s balance sheet. Assets that are frequently not listed on the balance sheet include:
  • Management expertise
  • Patents
  • Brand Loyalty
  • Customer Lists
  • Intellectual Property

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