What is the Classification of Assets – Explained

Asset classification is a process for systematic segregation of the assets into various groups, based on the nature of the assets, by application of the accounting rules so as to make proper accounting under each group. The groups are later consolidated at the financial statement level for the purpose of reporting.

Three Classifications of Assets

Business assets can be divided into three different categories based on their convertibility, physical existence, and usage. What are these three types of assets?

  • Convertibility describes how easily assets can be converted to cash.
  • Physical existence describes whether an asset physically exists or is intangible.
  • Usage describes the purpose of an object as it relates to business operations.

Classification of Assets: Convertibility

If assets are classified based on their convertibility into cash, assets are classified as either current assets or fixed assets. An alternative expression of this concept is short-term vs. long-term assets.

Current Assets

Current assets are assets that can be easily converted into cash and cash equivalents (typically within a year). Current assets are also termed liquid assets and examples of such are:

  • Cash
  • Cash equivalents
  • Short-term deposits
  • Accounts receivables
  • Inventory
  • Marketable securities
  • Office supplies

Fixed or Non-Current Assets

Non-current assets are assets that cannot be easily and readily converted into cash and cash equivalents. Non-current assets are also termed fixed assets, long-term assets, or hard assets. Examples of non-current or fixed assets include:

  • Land
  • Building
  • Machinery
  • Equipment
  • Patents
  • Trademarks

Classification of Assets: Physical Existence

If assets are classified based on their physical existence, assets are classified as either tangible assets or intangible assets.

Tangible Assets

Tangible assets are assets with physical existence (we can touch, feel, and see them). Examples of tangible assets include:

  • Land
  • Building
  • Machinery
  • Equipment
  • Cash
  • Office supplies
  • Inventory
  • Marketable securities

Intangible Assets

Intangible assets are assets that lack physical existence. Examples of intangible assets include:

  • Goodwill
  • Patents
  • Brand
  • Copyrights
  • Trademarks
  • Trade secrets
  • Licenses and permits
  • Corporate intellectual property

Classification of Assets: Usage

If assets are classified based on their usage or purpose, assets are classified as either operating assets or non-operating assets.

Operating Assets

Operating assets are assets that are required in the daily operation of a business. In other words, operating assets are used to generate revenue from a company’s core business activities.  Examples of operating assets include:

  • Cash
  • Accounts receivable
  • Inventory
  • Building
  • Machinery
  • Equipment
  • Patents
  • Copyrights
  • Goodwill

Non-Operating Assets

Non-operating assets are assets that are not required for daily business operations but can still generate revenue. Examples of non-operating assets include:

  • Short-term investments
  • Marketable securities
  • Vacant land
  • Interest income from a fixed deposit

How do different types of assets in accounting work?

Above, we’ve provided you with a guide to the different types of assets, but when it comes to the types of assets on a balance sheet, it’s a little different.

Basically, when you’re recording your business’s assets in your accounts, there’s no need to categorize your assets on such a granular level. Most of the time, there are only two types of assets on a balance sheet: current assets and fixed assets.

Furthermore, intangible assets pose issues for classifying different types of assets in accounting, as it’s very difficult to assign a value to them. In any case, there’s no standardized valuation method.

How do you value your business’s “brand recognition,” for example? Ultimately, if you aren’t able to accurately assign a value to an intangible asset, you cannot report it on your balance sheet.

It’s also important to note that the different types of assets in accounting are expensed in different ways.

Although both processes describe similar things, depreciation is used for tangible assets (assets with a physical presence), whereas amortization is used for intangible assets. It’s essential to get this right, as depreciation and amortization can have a meaningful impact on your business’s taxable income.

Importance of Asset Classification

Properly classifying assets is important for company leaders to have an accurate picture of key financial metrics such as working capital and cash flow. Asset classification can also help a business qualify for loans—it gives the bank a clearer picture of the risk it’s taking on—work through bankruptcy and calculate tax liabilities.

Distinguishing operating assets from non-operating assets also helps organizations see how each asset type drives overall revenue.

How Do I Know If Something Is an Asset?

An asset is something that provides a current, future or potential economic benefit for an individual or other entity.

An asset is, therefore, something that is owned by you or something that is owed to you. Therefore, a $10 bill, a desktop computer, a chair, or a car are all assets.

If somebody owes you money, that loan is also an asset because you are owed that amount (even though the loan is a liability for the one paying you back).

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