Business Assets: Definition and Examples

KEY TAKEAWAYS

• Business assets can generate revenue or create value for a company.
• Business assets can be divided into four main categories: current, fixed, financial investments, and intangible assets.
• Physical assets include things like property, equipment, and inventory. Examples of intangible assets are intellectual property, goodwill, and branding.
• All business assets are essential and contribute in some way to the company’s success.

What Is a Business Asset?

A business asset is an item of value used to generate revenue or create more value for a company. From physical property and equipment to intangible assets like intellectual property and goodwill businesses depend on a variety of assets to function.

As expected, not all business assets are created equal. While some are necessary for the day-to-day running of the business, others may be used to generate income or create value. Invariably, some business assets are worth much more than others.

Since all businesses are different, the assets they rely on will also vary. Each type of asset has its own unique characteristics and purpose. The most important thing to remember is that all business assets contribute in some way to the company’s success.

Though not all assets are used for the same purpose, they all have the potential to create value. Whether it’s through generating income, cost savings, or creating efficiencies, they should be managed accordingly.

Classification of Business Assets

Broadly speaking, business assets can be classified into four main categories: Current assets, fixed assets, financial assets, and intangible assets.

1. Current assets

These are either cash or assets that can be converted into cash within a year. Some typical examples are accounts receivable and inventory. Businesses that deal with physical products have inventory, including raw materials, finished goods, and on-hand supplies. As their name implies, current assets are essential for businesses to maintain their day-to-day operations. They are also known as liquid assets.

2. Fixed Assets

Fixed assets include things like property, equipment, buildings, and machinery. While they may not be as liquid as current assets, they are still crucial to the running of the business. Another term for fixed assets is non-current or long-term assets.

• Property: Office space, warehouses, land, and buildings are all examples of property assets. 
• Equipment: Machinery, tools, vehicles, and other equipment used in the running of the business are classified as equipment assets. 
• Furniture: All businesses have furniture, whether it’s office furniture like desks and chairs or store fixtures like shelving and racks.

3. Financial Investments

Many businesses also have financial investments, which can be either current or long-term, depending on the type of investment. Current asset financial investments include stock or short-term bonds while long-term financial investments include long-term bonds and mutual funds. Businesses will often invest in these assets to generate income or for speculation purposes.

4. Intangible Business Assets

Intangible assets are non-physical things that a business owns. These assets are usually more valuable than physical assets and can be divided into two main categories: intellectual property and goodwill.

• Intellectual property: These assets cover patents, trademarks, and copyrights. Most intellectual properties are things that a business can use to create a competitive advantage. As an example, a business may have a patent on a new product or process. And as a result, no other business can legally produce or use that product or process.
• Goodwill: Goodwill is the value of a business that goes beyond its physical assets. Goodwill connotes the reputation and image a company has built up over time. It’s usually associated with a business’s reputation, name recognition, and customer base.

Working Process of Business Assets

Business assets are important because they help businesses generate revenue and profit. This means a successful business needs to use their assets effectively and efficiently. 

Two main ways businesses generate revenue and profit are through production and marketing. Businesses use their assets to produce goods or services. Afterward, they market and sell these goods or services to customers using suitable marketing channels.

Businesses must carefully manage their assets to generate revenue and profit. This means using the right mix of assets, investing in quality assets, and maintaining and repairing assets when necessary. If businesses don’t manage their assets effectively, they will likely see a decline in revenue and profit.

Valuation of Business Assets

Business assets can be valued in several ways. The most common method is to use the historical cost approach. Under this approach, assets are valued at the price paid for them when purchased, offering a straightforward method for how savings bonds work.

The historical cost approach is the most common method because it’s easy to calculate and objective. However, there are some drawbacks to using this approach. For one, historical cost doesn’t take into account asset appreciation.

Businesses can also value their assets using the fair market value approach. When using this approach, assets are revalued at their current market value at the end of each financial period, which could be monthly, quarterly, or annually. Other valuation methods include the replacement cost approach and the earnings approach.

It is essential to carefully consider the best valuation method for your business before making any decisions. The wrong approach could lead to over- or under-valuing your assets, which could have serious implications for your business.

Importance of Business Assets

While it is easy to ignore the importance of business assets, they play a vital role in the success of businesses. Here are a few key reasons why business assets are so important:

• Business assets help businesses generate revenue and profit, without which they would quickly go out of business.
• Business assets can give businesses a competitive advantage. If a business has a unique asset, it can use that asset to its advantage and gain an edge over its competitors.
• Business assets can be used as collateral for loans. Which can, in turn, help businesses get the financing they need to grow and expand.
• Business assets can be used to secure investments. Businesses can use their assets to attract investors and get the funding they need to grow.

Uses of Business Assets

It’s not enough to simply have business assets—businesses need to know how to use them. Here are a few examples:

• To produce goods or services.
• To market and sell goods or services.
• To finance growth and expansion.
• To attract investors.

Interesting Facts about Business Assets

Whether you’re a business owner or an employee, it’s always helpful to know a few interesting facts about business assets. And who knows, you might even be able to use some of this information to your advantage!

• The total value of business assets in the United States was $520 trillion in 2020. 
• There are different types of business assets. The most common type of asset is cash and equivalents. Other common types of assets include accounts receivable, inventory, property, plant, and equipment.
• The difference in median return on operating assets was 15% in the 1990s but has recently doubled to 30-35% — an enormous gap in the profitability of operating assets.

Summary

Business assets are essential for businesses of all sizes. Whether cash, inventory, or property, businesses need to know how to use their assets to generate revenue and profit. By carefully valuing and managing their assets, businesses can give themselves a competitive advantage and secure the financing they need to grow and expand.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.