September 23, 2020

SB-Accounting

Accounting + Finance Blog

Assets: Meaning and Explanations

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What exactly are assets? Too many person assets are those resources a business used to earn revenue and profit. To another set of persons, assets are the properties that belong to a particular person or business. Let’s take a gleaming look at the definition of an asset.

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Definition of assets

Generally, assets are the properties of a business.

The International Accounting Reporting Standards (IFRS) foundation defines an asset as a present economic resource controlled by an entity as a result of a past event.

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Key Explanations

The definition provided by the IFRS Foundation is all-embracing. However, we will begin the definition from the general one.

Assets are the properties of a business. Think of anything that belongs to that business. You can regard such as assets. A good example of an asset is furniture.

However, not all properties of business are regarded as assets. This, therefore, limits this definition of an asset. For example, in a Fashion designer office, a stapler is an asset. This is so, as the stapler is the property of that business. But, it is never treated in accounting as an asset. Why? Because the amount involved in buying a stapler is less expensive. Therefore, it is treated in the books of account of that business as an expense.

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Properties can be used for a long period of time. Assets remain for a long time. At least, 4 years. A stapler can last for more than 4 years if it is not misplaced or mishandled. But, in accounting, it is never regarded as an asset.

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The asset must not earn revenue for the business. Why not! From the general definition, you will notice that assets are not stated as the property of a business which must earn revenue. To determine if an item is an asset, consider the following?

1. The amount involved is huge, therefore, it cannot be a write-off as an expense.

2. The item can exist for more than one years.

Although assets should earn revenue, it is not compulsory. For example, the Motor Car bought for a director does not earn revenue for the business. However, it fulfils the above criteria. That is, it is expensive and it can exist for more than a year.

After regarding an item as an asset, at the end of each year, a fraction of the value is written off as an expense. For example, if the manager’s mayor car was acquired for 5 million Naira and it is expected to last for 5 years. On a yearly basis, 1 million Naira will be written off as an expense. The expense represents the part of the asset that is assumed to be used up for each year. That is, 1 million Naira multiplied by 5 years.

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Form the definition provided by the IFRS Foundation, the following cm be deduced.

The asset is a present economic resource. The item regarded as an asset must be identified as one. And it is an economic resource.

Economic resources are rights that can produce economic benefit. It has the potential to provide economic benefit to the owner(s) of the item. Cash in hand is a good example of an asset that has the potential to provide economic benefit. Holding cash will not provide any economic benefit. But has the ability to do so, if used in the right way. Cash, which is a financial asset, when used to invest in a business or buying shares may at the end of a period provide economic benefit.

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Other economic resources may enhance economic benefit. That is, these assets cannot earn revenue as a result of its usage. However, it can enhance the business ability to earn revenue.

Staff bus of a business cannot earn revenue. However, it is used to move workers of that entity to and fro the firm. In such a case, it enhanced economic benefit.

The definition also states that assets are controlled by an entity. An entity has control over an item if it can direct the use of the economic resource and the economic benefit flows to that entity.

For example, an entity can be said to have control over a building if it can direct the use of it. The firm can decide to rent part of it and the economic benefit will flow to the entity through rent received from the tenant.

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It is also possible for an entity to have partial control over an economic resource. When such a case exists, the entity’s asset is the proportion it has control. This is common in areas of investment assets. A firm may have invested 50,000 Naira to be a part-owner of another business. Therefore, the part of the business the entity owned is the amount invested.

Examples of assets

1. Physical Assets: Plants and Machinery, Land and Building, Real Estate, Motor car, Motor Van, Furniture, account receivables, inventories, etc.

2. Intangible Assets: Goodwill, Patent right, intellectual right, etc.

3. Investment Assets: Cash and cash equivalent, account receivables, loans to customers, derivatives, trading assets, pledged assets, etc.

4. Fictitious assets: Preliminary expenses, liquidation cost capitalised, etc.

The term assets have been dealt with within this article. However, not all areas were covered. In the next lesson, the term “gains” will be discussed.

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