Classification of assets

Classification of assets
See also
Physical asset Matching principle Nonmonetary assets Amortization of intangible assets Equity instrument Total income Investments Business personal property Opening balance

Assets are classified according to the possibility of changing them into cash (the degree of liquidity). The principle of increasing liquidity applies. At the very beginning of the classification, it is necessary to demonstrate a debt which is difficult to convert into cash in a short time, then more liquid current assets. Property resources is a reliably determined value, controlled by the enterprise, obtained as a result of past events that in the future they will cause an inflow of economic benefit. Property resources does not have to be ownership of a company to include them in the balance sheet.

We can divide assets due to the form in which they occur:

• tangible assets- property assets that have a physical (material) form,
• financial assets - capital instruments, financial instruments,
• intangible assets - property resources that do not have a material or financial form

The assets are divided into five separate section.

Current assets - consist of cash and other assets that should be converted into cash within 1 year

• cash
• short-term investments or marketable securities
• accounts receivable
• inventories - goods or products
• other current assets

Fix assets - that are classified as long-term. These include:

• Long-term investments - include purchased funds and investments in other entities. include bonds and similar investments. These bonds of value usually more than one year.
• Property, Plant and equipment - Included in this classification are land, buildings, vehicles office equipment, machinery, furniture and fixtures used in a business.
• Intangible assets - includes patents, copyrights, franchises, goodwill, trademarks, and trade names, and software and other intangible computer based assets
• Other assets - in this section we can include assets that do not fit into any of the above categories

How to classify the assets

To properly classify assets, it should be determined whether a given resource qualifies as an asset. Property resources of the company can be recognized as assets in the balance sheet if they meet 3 criteria:

• the ability to exercise control over them by the unit
• the ability to reliably determine their value
• the entity's future economic benefits

Asset in the balance sheet

Each organization has a tangible property in the form of land, buildings, vehicle and equipment to run a business. Every company should making a balance sheet in the end and beginning of every billing period. The balance sheet is the basic financial report, prepared as at the specified date. In balance sheet we show the assets and debts of the business at the same time in material and financial terms. The classification of property resources helps to clearly illustrate the state of the company's assets for a given day. It is a tool that helps keep order and systematic records in every origination.

Sources of asset financing

The assets can be financed in company from various sources. We can divided:

• Capitals - shares of owners in the company's assets. This capital is decreased by liabilities and provisions for liabilities
• Liabilities - resulting from past activities, the obligation to provide services with a reliably determined value that will result in the use assets.

The sources of assets in the company, referred to in the balance sheets as liabilities - must be show in terms of value. The sums of assets and liabilities always must be the same. Owner's capital should finance around 50 % of the whole capital of the company. This type of structure allows to maintain long-term financial liquidity. In current conditions economy basing on knowledge, very often inalienable property resources acquire meaning. The definition of asset included, apart from property and property rights also acquired knowledge and skills belonging to qualified employee. This type of resources generating the impact of economic benefit on a knowledge in the company.

Valuation of assets

Capital assets can be valued at 3 types of prices:

• historic prices - assets are valued at the prices at which the assets were originally acquired
• current prices - assets are valued at the price of the current year
• constant price – assets are valued at the prices of a selected year

References

• Stewart, J.E. Green, J.F. (2007). CCH Accounting for Financial Assets and Liabilities: Sales, Transfers, and Extinguishments, CCH.
• Rich, J. Jones, J. (2017). Cornerstones of Financial Accounting, Cengage Learning.
• Lustig, Y. (2014). The Investment Assets Handbook: A definitive practical guide to asset classes, Harriman House Limited.

Footnotes

Author: Patrycja Garbacik