What Is An Asset?: Definition And Examples
Jerry Brown4-minute read
October 22, 2021
For companies and individuals, having assets is essential to good financial health. If your goal is to improve your finances, you should collect more of them over time. They can help a business expand and help you build wealth.
Below, we’ll cover what an asset is, how they work, how to determine their value and cover different types of personal and business assets.
What Are Assets?
An asset is something of economic value that you or a company own. It can be something tangible (you can touch or feel), like a car or business equipment, that can be sold and converted into cash; or it could be something intangible (you can’t touch), like a company’s registered trademark or patent.
How Assets Work
It’s common for a company or individual to purchase an asset with the expectation it will provide future returns. When the asset is sold or traded, it will incur capital gains tax. For example, an individual may purchase stocks to build wealth. If the stocks are sold at a higher price than they initially bought them for, they’d have to pay short- or long-term capital gains taxes.
However, there are no guarantees in life. While an asset can increase in value, it can also decrease. Imagine buying a stock at one price and it drops below the price you paid for it. If you sell the stock at a lower price, it could be considered a capital loss when you file your taxes.
Personal Asset Examples
If you’re wondering what else is an asset besides stocks and real estate, here are some common examples of personal assets.
- Cash: Any cash you have lying around the house is an asset. Think about all the places you have money on hand. You can include funds that you’ve received via Venmo or a similar platform but have not yet cashed out.
- Retirement funds: Retirement accounts such as your 401(k), IRA, or TSP are considered assets.
- Vehicles: Although your vehicle is considered an asset, it’s normally considered a depreciating asset. Cars often lose value the minute they are driven off the sales lot.
The Difference Between Personal And Business Assets
Similar to how you have personal assets, a business also has assets. Business assets can be broken into six categories, including:
Although a business can have the same types of assets as a person, such as cash or real estate, some assets are unique to businesses, including:
- Accounts receivable
- Intellectual property
- Brand recognition
How To Determine The Value Of Your Assets
Calculating the value of your assets gives you a snapshot view of your financial health. There are different ways to figure out the value of your assets, including discounted cash flow approach and cost approach. The former bases the current asset’s value (say a stock) on its expected future cash flow. The latter bases an asset’s value (usually real estate) on the cost of similar assets, like comparable homes in your neighborhood.
If you’re unsure of the value of an asset, you can estimate its value or do some research. For example, if you own a car, you could look up its value on reputable sites like Kelley Blue Book. In addition, you can use online tools to estimate your home’s current market value.
Here’s three steps to take to calculate your total assets.
Step 1: List Assets
To get an accurate view of your financial health, start by listing all of your assets.
Step 2: Create A Balance Sheet
Next, create a balance sheet - a financial document that lists your liabilities (debts you owe), assets, net worth (or equity).
Step 3: Add Assets
Once you’ve created a list of your assets, add them up to find your total assets.
How To Grow Your Assets
One way to increase your assets is to decrease your spending. With a tighter budget, you’ll have more resources to allocate towards savings. In addition, you could invest your money to grow your assets even faster.
However, keep in mind that with investing, there’s a chance you could lose some or all of your money. It’s always a good idea to talk to a financial advisor before making any investment decisions.
Asset Vs. Liability Vs. Equity
Liability is the opposite of an asset – it’s money you or a company owes. For you, this could be things like a car payment or credit card bill. And for a company, it could be a business loan.
Equity represents the percentage of ownership a company or person has in an asset. For example, say you own a home with a market value of $200,000 and your outstanding mortgage balance is $100,000. In this situation, you have $100,000 worth of equity in the home.
Once you know your total assets and liabilities, you can calculate your net worth. Your net worth is your total liabilities subtracted from your total assets. For example, if your total assets equal $300,000 and your total liabilities is $100,000, then your net worth is $200,000 ($300,000 - $100,000).
Why Assets Matter
Assets are important because their sum contributes to a person or company’s net worth. The greater your net worth is, the better your financial position. Having enough assets on hand can help you or a company handle all types of financial emergencies.
The goal is for your net worth to increase over time. If you plan to retire in the future, building wealth is essential. Having a substantial amount of assets allows you to fund a comfortable retirement and reduces the risk that you’ll run out of money.
Lenders can also take liquid assets, such as cash and bank funds, into account as a part of your (or a company’s) loan application. For example, when you apply for a home loan, it is not uncommon for the lender to request more information about the funds you have available. These liquid assets can be critically important to determine whether your loan is funded, especially if you have a bad credit score.
The Bottom Line
An asset is a tangible or intangible thing a person or company owns that provides economic value. Adding up all of your assets and subtracting your liabilities gives you your net worth. By tracking how your net worth changes over time, you can see if your financial health is improving or declining.
To learn more about this topic, read our article on liquid assets. The article provides a larger list of some assets that are considered liquid.
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