Asset definition

An asset is an expenditure that has utility through multiple future accounting periods. If an expenditure does not have such utility, it is instead considered an expense. For example, a company pays its electrical bill. This expenditure covers something (electricity) that only had utility during the billing period, which is a past period; therefore, it is recorded as an expense. Conversely, the company buys a machine, which it expects to use for the next five years. Since this expenditure has utility through multiple future periods, it is recorded as an asset.

If an asset was purchased by an entity, it is recorded on the balance sheet. However, some assets are acquired at such a low cost that it is more efficient from an accounting perspective to charge them to expense at once; otherwise, the accounting staff must track these assets through multiple periods, and determine when they have been consumed and should therefore be charged to expense.

When assets are recorded on the balance sheet of a business, they are classified as being either short-term or long-term assets. A short-term asset is expected to be consumed within one year, while long-term assets are to be consumed in more than one year. Examples of short-term assets are:

Examples of long-term assets are:

  • Land

  • Buildings

  • Office equipment

  • Furniture and fixtures

  • Software

Some intangible assets are not recorded on the balance sheet, unless they have been purchased or acquired. For example, a taxi license can be recognized as an intangible asset, because it was purchased. Also, the value of a customer list that is part of an acquired business can be recorded as an asset. However, the value of an internally-generated customer list cannot be recorded as an asset.

An asset may be depreciated over time, so that its recorded cost gradually declines over its useful life. Alternatively, an asset may be recorded at its full value until such time as it is consumed. An example of the first case is a building, which may be depreciated over many years. An example of the latter case is a prepaid expense, which will be converted to expense as soon as it is consumed. An asset that is longer-term in nature is more likely to be depreciated, while an asset that is shorter-term in nature is more likely to be recorded at its full value and then charged to expense all at once. The one type of asset that is not considered to be consumed and is not depreciated is land. The land asset is presumed to continue in perpetuity.

An asset does not have to be tangible (such as a machine). It can also be intangible, such as a patent or a copyright.

At a less well-defined level, an asset can also mean anything that is of use to a business or individual, or which will yield some return if it is sold or leased.

On the balance sheet of a business, the total of all assets can be calculated by adding together all liabilities and shareholders' equity line items.

Related Courses

Bookkeeper Education Bundle 
Bookkeeping Guidebook 
The Balance Sheet