Assets in Accounting

What are Assets in Accounting?

Assets in accounting are a fundamental part of the accounting equation.

Assets = Liabilities + Equity

Assets are things which are a cost to the business and have a future economic benefit. For example, if a business purchases a piece of machinery for use in its factory, then the machinery will be in use over its useful life to manufacture products, and therefore has a future economic benefit to the business.

In contrast to this, if a business purchases items which have no future economic benefit, then this cost will be recorded as an expense. For example, if the business has a wage cost for hours worked by factory employees, then this cost has no future benefit (the hours paid for have already been worked) and the cost is treated as an expense.

In addition, costs which are immaterial may also be treated as expenses even though they might have a future benefit. For example, a box of pens has a future value, but the cost is immaterial and the time and effort needed to monitor the inventory of pens is such that it would be more efficient to record the cost as a stationery expense in the current accounting period.

It should be noted that the term assets in accounting is much narrower than that used in the general sense. Not all assets have a cost, for example employees, customer lists or the inherent brand value of a business are in the general sense assets, but since they have no cost, they are not regarded as assets in accounting and are not included on the balance sheet of the business.

Assets Accounting Records

In the accounting records, asset accounts normally have a debit balance which means they are increased by debit entries and decreased by credit entries.

Assets are shown on the balance sheet of the business as either current assets or non-current assets.

Current Assets

Current assets can be converted into cash or used within a year and asset account examples include cash, accounts receivable, investments, inventories, and prepaid expenses.

Non-Current Assets

Non-current assets are expected to be converted into cash after more than one year and asset account examples include long term investments, property, plant and equipment, and intangible assets.

For further information see the Wikipedia definition.

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Assets in Accounting August 1st, 2016Team

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