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.
To put it more simply...
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.
Employees can even be seen as assets.
(See further below for the full test of assets
and how we treat employees in accounting)
What is the test of whether something is considered an asset for your business? Well, one asks, “Is the _______ something I own, and will it bring me benefits in the future?”
Let’s take land. If you owned the land, would it be an asset for your business? Not sure? Well, do you expect to receive benefits for your business in the future from the land? Of course. So what are the benefits it will bring? Well, you can construct a building on it that you can use for business. Even selling it would bring benefits, in the form of cash.
How about a computer that you own – is this an asset? Will it bring you benefits in the future? Well, amongst other things, you can store and retrieve large amounts of information and use it to communicate with suppliers and customers.
So yes, a computer is certainly an asset.
What about a motor vehicle – is this an asset? Does it have benefits for your business, and if so, what are they?
Answer: Yes, there are benefits for your business... You can use the motor vehicle to pick up and deliver goods. So yes, this is also an asset.
Now let’s take something more tricky – what about cash? Is cash an asset? Answer: cash is certainly an asset. What are the benefits of having cash? Simple: you can pay for things! That is certainly useful (and indeed essential) for a business.
Have you ever heard of debtors? Debtors are people that owe your business money and the value of these debts as a whole.
Another name for debtors is accounts receivable. The word receivable simply meanscapable of being received, or will be received.
Would debtors or accounts receivable be an asset for your business?
Answer: Even though you cannot own a debtor, you will get benefits in future from having money owed to your business.
The benefits are simple – you will get paid! So if you have $3,000 owed to you by Mr. Smith, you have a debtor, an asset, worth $3,000.
An additional requirement for an asset is that you have to be able to measure its value somehow and you have to be able to measure this accurately. This is usually quite simple, as the value is equal to how much you paid for it.
So let's return to employees... how do you value an employee? Can you put an accurate, reliable figure on how much an employee is worth to you, bearing in mind that he or she can resign at any point by giving notice? Tricky, right? As you can imagine, it's nearly impossible to place a value on people – consequently employees are actually never included as assets in accounting - but only because we can't value them.
So the full test of whether something is an asset is:
1. DOES YOUR BUSINESS OWN/CONTROL IT?
2. WILL IT BRING YOUR BUSINESS BENEFITS IN THE FUTURE?
3. CAN YOU VALUE IT ACCURATELY?
If these three criteria are met, then you have an asset according to the accounting system.
There’s a basic rule about how one values any asset. The rule is:
The cost of an asset includes all costs necessary to get it to the business premises and into a condition in which it can be sold.
So the cost of an asset can include the following:
- Purchase price,
- Import duties,
- Transport costs to get it to your premises,
- Installation or set-up costs.
Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)
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