In our previous lesson we were introduced to the basic accounting equation and its three elements: assets, liabilities and owners equity.
In this lesson we're going to learn the full definition of assets in accounting, when to recognize something as an asset and how to value them.
The Official Asset Definition
An asset is officially defined as:
A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
A Simpler Definition
The official definition of assets above is slightly complicated.
Let's put it in simpler terms:
An asset is a possession of a business that will bring the business benefits in the future.
An asset is anything that will add future value to your business.
Asset Recognition Criteria in Accounting
But the definition of assets above is not yet complete.
In accounting we have specific criteria which need to be fulfilled in order to recognize an asset in our accounting records.
What is the test of whether something is considered an asset for your business?
Well, one asks:
1. IS THE _______ SOMETHING I OWN OR CONTROL?
2. AND WILL IT BRING ME BENEFITS IN THE FUTURE?
FYI, with assets we're talking about spending on things which will provide us continuing benefits into the future. But did you know that we can also spend on things which provide us only immediate benefits? These are what we call expenses.