Importance of Asset Classification
A business must classify assets. A company’s net working capital depends on its current and fixed assets. Knowing a company’s tangible and intangible assets helps assess its solvency and risk in a high-risk industry.
Knowing which assets are running and which are non-operating is crucial to understanding how much revenue each asset generates and what percentage of a company’s revenue originates from its primary business operations.
Basic Asset Classification
Any resource that is owned or controlled by a company is considered an asset of that company. It refers to anything that could be exchanged for monetary gain.
An individual, business, or country owns or controls an asset to reap future rewards. A company’s balance sheet lists assets that increase its value or efficiency. An asset may generate revenue, reduce expenses, or increase sales
- CONVERTIBILITY: Liquidity, or convertibility, is the ease of turning an asset into cash
- PHYSICAL EXISTENCE: The existence of a physical item is a qualification for classifying an asset.
- USAGE: Business use categorizes assets. Operating assets are used for your business’s main purpose. Non-operating assets are those you own but don’t use.
Convertibility
Putting assets into categories based on how straightforward it is to turn them into cash.
Current Assets: To qualify as a current asset, an asset must either be converted into cash or depleted of its value during the span of one financial year in order for it to be considered current.
Cash and cash equivalents comprise current assets. Marketable securities like stocks and bonds, accounts receivable (the money your customers owe you), and inventories, if applicable, are other current assets.
Cash, Cash equivalents, Short-term deposits, Accounts receivables, Inventory, Marketable securities, Office supplies
Non-Current or Fixed Assets: Long-term assets that are kept in use for more than a year are known as noncurrent or fixed assets.
property that cannot be moved quickly; examples include land, buildings, machinery, long-term investments, and patents or intellectual property.
Land Building, Machinery, Equipment, Patents, Trademarks
Physical Existence
If assets are divided according to their physical nature, we can divide them into two categories: tangible and intangible.
Assets that are “tangible” can be physically handled, while “intangible” assets cannot.
Tangible Assets:
Assets are considered tangible if they have a physical reality and can be perceived directly through the senses of touch, smell, and sight.
These assets consist of monetary funds, buildings, machinery, real estate, plant life, and inventory.
Land Building, Machinery, Equipment, Cash, Office supplies, Inventory, Marketable securities
Intangible Assets
Intangible assets are those that have monetary worth but do not have a physical form, unlike tangible assets, which do have a physical form.
Goodwill, Patents, Brand, Copyrights, Trademarks, Trade secrets, Licenses, and permits, Corporate intellectual property
Based on Usage
Assets can also be grouped by commercial usage. Your business relies on operating assets. You hold non-operating assets that you don’t utilize regularly or for commercial objectives.
Operating Assets
These assets include everything that is necessary for the day-to-day operations of a business.
Operating assets are the assets that a corporation utilizes to support its business operations and produce income.
Cash, Accounts receivable, Inventory, Building, Machinery, Equipment, Patents, Copyrights, Goodwill
Prepaid Expenses
A company’s prepaid expenses include the value of the assets it has accumulated by prepaying for future goods and services.
Insurance premiums are pre-paid expenses. Insurance premiums are paid before the policy’s 6- or 12-month term. Another example is large office and computer supplies that are slowly used up. Property taxes might be paid at the beginning of the year and distributed over the months that benefit from them.
How to Calculate Operating Assets
Operating assets = ( Cash ) + ( Total Accounts Receivable ) + ( Prepaid Expenses) + ( Total PP&E ) + ( Tangible Assets ) + ( Intangible Assets )
Importance of operating assets
Operating assets represent a company’s value and ability to create income and convert non-cash assets to cash. Operational assets also calculate net operating assets and reveal a company’s financial health and security.
The average operating assets can also reveal a company’s operational asset turnover ratio, or how fast it generates revenue from its assets. This ratio shows how well a corporation utilizes its operating assets to make money.
Non-Operating Assets
Non-operating assets are those belonging to a company that is not essential to its day-to-day operations but yet have the potential to bring in revenue.
Short-term investments, Marketable securities, Vacant land, Interest income from a fixed deposit
