Asset classification definition
/What is Asset Classification?
Asset classification is a system for assigning assets into groups, based on a number of common characteristics. Various accounting rules are then applied to each asset group within the asset classification system, to properly account for each one. The groups are also typically clustered for reporting purposes in the balance sheet.
As an example of how accounting rules may be applied to the assets within a group, all of the fixed assets in the computer software group could be assumed to have the same useful life, to which is applied a standard depreciation methodology. Doing so makes it easier to account for the assets in this group.
Types of Asset Classification
Assets can be classified in several ways to support financial reporting, strategic planning, and risk management. Common asset classifications include those based on type, function or purpose, importance, and risk level, each offering a distinct perspective on how assets contribute to an organization.
By asset type. This classification separates assets into tangible (e.g., buildings, machinery) and intangible (e.g., patents, trademarks) categories. For example, a delivery truck is a tangible asset, while a company logo is an intangible asset.
By function or purpose. Assets are grouped according to how they are used in operations, such as operating assets (used in daily business) and non-operating assets (held for investment or strategic reasons). A manufacturing plant would be an operating asset, while an unused parcel of land held for future sale is a non-operating asset.
By importance. This classification ranks assets by their criticality to business continuity, such as essential vs. non-essential assets. For instance, a hospital’s medical equipment is essential, while decorative artwork in the lobby is non-essential.
By risk level. Assets can also be categorized based on the level of financial or operational risk they carry, such as low-risk (cash equivalents) versus high-risk (cryptocurrency holdings). An example is classifying U.S. Treasury bills as low-risk and speculative real estate investments as high-risk.
Examples of Asset Classifications
Common asset classifications are as follows:
Cash. Includes cash in checking accounts, petty cash, and deposit accounts.
Receivables. Includes trade receivables and receivables due from employees.
Inventory. Includes raw materials, work-in-process, and finished goods.
Fixed Assets. Includes buildings, computer equipment, computer software, furniture and fixtures, and vehicles.
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The Current Assets and Long-Term Assets Classifications
Two broader classifications of assets are the designations of current assets and long-term assets. These classifications are strictly time-based. The current asset designation refers to all assets that will be used within one year. The long-term asset designation refers to all assets that will be used in more than one year. For example, accounts receivable are usually classified as current assets, while fixed assets are classified as long-term assets.
Examples of Investment Asset Classifications
The concept of asset classification can also apply to the different types of investments that a person or entity holds. Examples of these asset classifications are as follows:
Bonds
Cash holdings
Collectibles
Commodities
Equity securities
Real estate