If you own something that you can sell, it’s an asset. Every small business has them: they’re a glass manufacturer with specialized equipment or an individual that participates in buying and selling rare trading cards. “What are your assets?” is a common question, especially during the review of a business’s finances. Let’s get into how they can be classified and categorized.
What are assets?
Assets are the resources a company or business entity owns with the expectation that they’ll generate income now or produce future economic benefit. Alongside liabilities and equity, assets are one of the three pillars of the business accounting equation.
On a balance sheet, assets are listed on the left and liabilities on the right. The most liquid assets are listed first, down to the least liquid at the bottom of the balance sheet.
How are assets classified?
Different assets serve different purposes. On a balance sheet, assets are classified in terms of:
- Convertibility. How quickly an asset can be converted into cash (i.e., liquidated).
- Physicality. Whether or not an asset has a physical form (i.e., physical existence).
- Usage. How the asset is used.
6 types of assets
Within each of these three classifications—convertibility, physicality, and usage—there are two categories, for a total of six categories. There are “current” and “non-current” convertibility assets, “tangible” and “intangible” physicality assets, and “operating” and “non-operating” usage assets.
An asset usually falls into one category per classification. For example, an asset can be described as a current, tangible operating asset. Let’s take a closer look at each of these categories:
Categories of convertibility assets
- Current assets
- Non-current assets
When we talk about convertibility, we’re talking about converting assets to money. Assets classified under convertibility are either current or non-current assets. Current assets are the first to be listed on a balance sheet, followed by non-current assets. Here’s how they differ:
1. Current assets
Current assets are short-term assets that can be used or converted into cash within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and office supplies. For a home goods company, current assets might include their inventory of handmade rugs, and computers to help their employees do their jobs. They can also include other stock they’ve prepaid but haven’t yet received—perhaps handcrafted pillows from Mali that are restocking soon.
2. Non-current assets
Non-current assets can’t be as quickly or readily converted into cash, but they’re important to hold onto, as they’ll provide future economic benefit. In other words, non-current assets are valuable, but you can’t immediately make money off them. Non-current assets include “property, plant, and equipment” (PP&E), real estate, long-term investments, patents, copyrights, and goodwill. For example, if the home goods company decided to copyright some of their artisans’ designs, those copyrights would be classified as non-current assets.
Categories of physicality assets
- Tangible assets
- Intangible assets
Physicality is just a fancy way to say, “Can you touch it with your hand?” Depending on how you answer the question, assets are categorized as either tangible (can be touched) or intangible (can’t be touched). On a balance sheet, tangible and intangible assets are listed as either current or non-current assets, with tangible assets first, followed by intangible assets.
1. Tangible assets
Tangible assets are those that physically exist—that you can touch with your hand. Tangible assets include non-current assets—like real estate, land, inventory, office supplies, etc.—and current assets, like cash. The home goods company’s tangible assets include its handmade rugs and pillows and the rest of its saleable merchandise.
2. Intangible assets
Intangible assets are those with no physical form, including intellectual property, trademarks, prepaid expenses, goodwill, and long-term investments. An intangible asset doesn’t directly contribute to the everyday functioning of a company but can help boost the company’s value over the long term. Intangible assets are the hardest to value because they often don’t have a going market rate. Some, like goodwill (quantified as the difference between a company’s sale price and its stock price when purchased), can only be assigned a monetary value when a company is bought or sold.
Categories of usage assets
- Operating assets
- Non-operating assets
Assets can be categorized as operating and non-operating assets based on their usage. On a balance sheet, operating assets appear first, and non-operating assets last.
1. Operating assets
Operating assets are those that are essential to a company’s business operations. “Operating,” in this case, refers to day-to-day functions. For the home goods company, operating assets might include computers for ecommerce functionality and anything they need to visit global artisans and source their wares. Other operating assets might include cash, accounts receivable, inventory, equipment, factory space, real estate, and machinery.
2. Non-operating assets.
Non-operating assets aren’t used daily, but they help generate income. For example, maybe you’re a farmer with vacant land. You’re not using it right now, but you could use it or sell it in the future. The home goods company, for example, might pre-pay artisans in other countries for products before they’ve been produced. This counts as a loan receivable and falls under non-operating assets. Other non-operating assets include short-term investments, marketable securities, and loans receivable.
Types of assets FAQ
What are the 3 classifications of assets?
What are the 6 types of assets?
What are common examples of assets?
- Patents and trademarks
- Office supplies
- Real estate
- Factory equipment
- Short term investments
- Long term investments