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 group. The groups are also typically clustered for reporting purposes in the balance sheet. 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.
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.
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.
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:
- Cash holdings
- Equity securities
- Real estate