When you sit down to determine your net worth or do a thorough analysis of your finances, the first issue you'll face is, "What are your assets?" In the broadest sense, the answer is anything you own that has monetary value and can be converted into currency.
What are assets?
Assets are owned by either individuals or corporations. Whether it's a company with resold equipment or a person with a high-priced jewelry collection, anything that is owned and has worth is an asset. The most significant quality of assets is their ability to create income both now and in the future.
In today's rapidly evolving financial landscape, the concept of assets has expanded beyond traditional definitions. Digital assets, such as cryptocurrencies and non-fungible tokens (NFTs), have emerged as a new class of assets that are gaining significant traction. These digital assets present both opportunities and challenges for investors and financial institutions alike, as they navigate the complexities of valuation, regulation, and integration into existing financial systems.
Importance of Assets
Assets can be valuable resources for individuals and corporations. Accumulating assets can refer to the gradual accumulation of wealth or the acquisition of valuable objects. If the items you own have any worth, you can always sell them and pocket the money, whether you are a business or an individual. However, how individuals handle their assets differs from how businesses do. People typically hold assets to accumulate wealth for retirement or to use as a financial resource. "A dividend stock is an asset that provides ongoing income to its owner and can be sold if necessary, freeing up purchasing power," explains Mark Berger, a CFP and account executive at Berger Financial Group. Companies, on the other hand, view assets as valuable commodities that may be employed to promote or sustain business growth. This could include machinery for manufacturing, inventory, annual sales, or receivables. "Assets are listed on a balance sheet to show how they were accumulated," Berger says. "This helps companies keep track of what they own and can sell within a fiscal year or what can be sold in the future once its value appreciates."
The formula for calculating your net worth is simple: assets minus liabilities. Liabilities are your bills and other financial commitments, whereas assets are your possessions. So, if you own a $250,000 home but owing $150,000 on your mortgage, the asset is worth $100,000.... It is critical to identify the value of all of your assets in this manner so that you may use the information to calculate your net worth. If you owe more than you own, your net worth will be negative. But it does not have to be this way. What is vital is to understand your net worth and watch how it changes over time.
The importance of regularly reassessing and revaluing assets cannot be overstated, particularly in times of economic volatility. Asset values can fluctuate significantly due to market conditions, changes in consumer preferences, or technological advancements. For instance, the COVID-19 pandemic has dramatically altered the landscape of commercial real estate, with many companies adopting remote work policies and reducing their office space requirements. This shift has led to a reevaluation of commercial property assets, highlighting the need for investors and businesses to stay agile and responsive to changing market dynamics.
Quick tip: Knowing your net worth can help you when applying for a loan or determining how much you can retire comfortably on. It can also assist you make debt-management and long-term investment decisions.
Types of Assets
Liquid Assets
Bank accounts, certificates of deposit (CDs), equities, and bonds are all liquid assets that can be easily changed to cash. Liquid assets differ from other assets in that not all of them can be sold for cash right now without incurring a loss or charge.
Illiquid Assets
These are items that take longer to convert to cash, such as real estate, antiques, and collectibles. Your property would be an illiquid asset since, even if you had a large amount of equity, the sale could take some time, depending on local market conditions. Furthermore, selling a home entails numerous stages and much documentation.
Current Assets
Current assets are short-term in nature. "Current assets are the category of a company's resources that are expected to be used in the course of normal business operations over the near term, less than one year into the future," says Matt Stucky, a senior portfolio manager at Northwestern Mutual Wealth Management Co. Stucky believes that a company's existing assets can provide insight into how much liquidity it will have to fund its day-to-day operations and satisfy short-term financial obligations. These short-term assets could include cash that a company will require to pay staff or purchase supplies, as well as goods that is now being sold to customers. The classification of an asset as current or noncurrent is determined by how long the company expects it to take to convert it into cash. To be eligible, assets must be used or converted within a year (or one operating cycle if longer).
Fixed Assets
Fixed assets produce value over a longer period of time than current assets.... A company's fixed assets may include land, machinery, and other tangible equipment used to produce the products and services it provides. According to Mike Zeiter, a CPA/PFS and CFP who operates Zeiter Tax Services, the easiest way to evaluate whether something is a fixed asset is if it will endure more than one year. For example, a toy manufacturer may purchase a 20-year-old assembly machine (fixed asset) and use it to mix toy parts (current assets) to make the toys it sells. "Fixed assets" typically refer to tangible assets rather than intangible noncurrent assets like patents, trademarks, and goodwill. Fixed assets, also known as noncurrent assets, long-term assets, or long-lived assets, are frequently listed in the property, plant, and equipment (PP&E) portion of a company's balance sheet.
The rise of the sharing economy and subscription-based business models has introduced a new dimension to the concept of fixed assets. Companies like Airbnb and Uber have disrupted traditional notions of asset ownership by leveraging underutilized assets owned by individuals. This shift has led to the emergence of "asset-light" business models, where companies can generate significant revenue without owning substantial fixed assets. As a result, investors and analysts are increasingly focusing on metrics beyond traditional asset valuations when assessing the potential of these innovative businesses.
Tangible Assets
Tangible assets are the physical items that you own. A tangible asset could be anything from cash in your bank account to a car or household furnishings. If you can physically touch and measure it, it is most likely a tangible asset. These assets are tangible objects with a definite monetary worth. They can be owned by people as well as businesses. A person's tangible possessions may include, for example, jewelry or an art collection. However, the concept of tangible assets is most commonly used in a corporate environment. Most businesses analyze two categories of tangible assets: current and long-term. They are also known as fixed or capital assets. The main difference between the two is how quickly the item may be swapped for cash. Some of the most frequent are cash, equipment, inventory, real estate, machinery, land, and receivables. "Your tangible assets are going to be anything to do with transportation, production capability, and manufacturing your service base," says Sage Advisory Services' president and chief investment officer, Robert Smith.
Intangible Assets
Intangible assets are non-physical items with worth. They include patents, copyrights, intellectual property, internet domain names, and a company's brand.... Although you cannot physically touch them, they have value and can be exchanged into cash. There are no restrictions due to age, contract, or regulatory duties. Companies typically record intangible assets on their financial sheets, but only those that they buy or acquire (such as a patent, email list, or a strong website). The intangible asset must have a lengthy lifespan and a clearly defined value. A firm will eventually acquire an intangible asset, whether it is receiving a business license, developing the brand's name (which leads in a direct rise in earnings), or trademarking anything. These assets may be acquired by: Purchase them. Receiving government grants Developing them in-house (software or a company that conducts research that results in the creation of a product or solution)
Examples of Assets
Cash and Cash Equivalents
Cash is money saved in the form of bills or coins, or in a bank account. Cash equivalents are highly liquid securities that can be readily sold and converted to cash.
Real Estate
Real estate refers to assets such as land and buildings. Real estate is less liquid than many other asset classes since its acquisition and selling are complex and involve numerous procedures.
Equipment and Machinery
Equipment and machinery are two types of assets that firms use. Specifically, they are fixed, tangible assets. Surprisingly, these objects can be classified as assets, while any loan used to purchase them can be considered a liability.
Patents and Trademarks
Patents and trademarks are forms of intellectual property that represent various intangible assets. Patents are issued for inventions, whereas trademarks are granted for designs, words, phrases, or any combination thereof that aids in the identification of a product or service.
Measuring Asset
Value Market Value
The market value of an item is the amount it would sell for in the open market at any given time. For example, if you hear that a company was sold for $20 million, you know what its market worth was at that time.
Book Value
The book value of an asset is calculated by deducting depreciation from its original cost. This is a method of calculating an asset's value using accounting principles. Fair value. The fair value of an asset is the price at which it would trade if the buyer and seller could agree on a transaction. The fair value of an item is what it would sell for in normal conditions, not what it would bring if sold during liquidation.
Assets in Personal Finance
Building Personal Wealth
Individuals can amass assets in order to increase their own wealth. For example, they could get cash, cash equivalents, stocks, bonds, and real estate. To calculate an individual's net worth, subtract their assets from their liabilities.
Diversification
The aim behind diversification is to avoid putting all of your eggs in one basket. Ideally, if one component of your portfolio loses value, the other portions will appreciate, compensating for the loss. A widely diversified portfolio may include a variety of asset classes, such as stocks, bonds, commodities, and real estate.
The growing awareness of environmental, social, and governance (ESG) factors has led to a shift in how assets are evaluated and managed. Investors are increasingly considering the long-term sustainability and ethical implications of their investments, leading to the rise of ESG-focused assets and investment strategies. This trend is reshaping the asset management landscape, with companies and investors alike placing greater emphasis on factors such as carbon footprint, social responsibility, and corporate governance when assessing the value and potential of assets.
Assets in Business Finance
Balance Sheet Components
A balance sheet consists of three components: assets, liabilities, and equity. Assets are resources that the organization can employ to achieve its goals. In contrast, liabilities indicate duties to other parties. The third component of a balance sheet is shareholder equity, which represents the capital invested by shareholders in a particular company, as well as its retained earnings.
Asset Management
Asset management firms buy, hold, and sell various assets to fulfill their business goals, which may include capital appreciation or capital protection. Such strategies can involve a wide range of assets, including equities, bonds, commodities, and cash equivalents.
