- Define assets
In financial accounting, an asset must meet two criteria:
- The company must own or control it.
- It must be expected to generate future benefit for that company.
For instance, if a landscaping company buys a delivery truck, they own the item. Even if they lease a truck, they still have legal control of the item, so it meets the first criteria (if it’s a long-term lease). The truck is also going to generate revenue, meeting the second criteria as well as the first. If the company just rents the truck for a day though, the cost is considered an expense.
Assets fall into two general subcategories: current and noncurrent.
Current assets are expected to convert into cash within a relatively short period of time (usually one year). For instance, when Apple makes iPhones, they classify the phones as inventory, which are goods held for sale in the ordinary course of business. Those phones are going to be sold, and cash will be collected within a few months. The iPhones are considered assets (until they are sold) and categorized as current assets.
The following is a list of common current assets:
- Checking accounts
- Savings accounts
- Short-term investments
- Accounts Receivable (money customers owe the company)
- Prepaid expenses (such as insurance paid in advance)
On the other hand, if a brewery buys a new building it is a noncurrent asset. It is going to produce revenue over a long period of time by being used to produce inventory, but it won’t be converted to cash any time soon.
The following is a list of common noncurrent assets:
- Long-term investments (stocks and bonds)
- Patents (rights to inventions)
Being able to correctly categorize assets is a fundamental skill for financial accounting. As you get further into the course, you’ll have more opportunities to practice and learn the correct way to record assets.