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The wealth gurus of the internet will go on and on about expanding your assets and reducing your debts, but what does that actually mean?
Assets are obviously important for businesses, but they are arguably just as important for individuals.
The problem arises from the fact that, at least from the perspective of individuals, few know what falls within the technical definition of an asset.
Let’s help by defining the term “asset,” explaining the different types, and discussing how you can acquire them.
What is an Asset?
The technical definition of an asset is a resource with a current economic value owned or controlled by a company, group, or individual and which will theoretically increase in value in the future or otherwise benefit the owner of said resource.
Here’s a lighter version of that definition: an asset costs something to own, and you would obtain it with the hope that it will increase or create value in the future.
That sounds like the definition of a stock, and a stock is, in fact, an asset, but you will find assets in far more places than the stock market.
Let’s take a step back and explore financial balance sheets. Balance sheets consist of assets, liabilities, and equity. If something isn’t a debt, then it must be an asset, right? Not so fast.
From the standpoint of a business, an asset is purchased to grow the company’s value in the future.
Think of a production facility and accompanying machines that build the products to sell to customers. These are all assets.
However, a company must usually borrow money to purchase those assets, so debts are also added to the balance sheet.
With this in mind, you can effectively think of the real estate and machines themselves as the assets, whereas the loans are taken out to purchase them are the debts.
Individuals usually misinterpret something as an asset, and one of the most common instruments to bring up in this conversation is a house or any real estate.
Some investment gurus may live and die by the belief that a house is not an investment. Others will swear that they are – so which is it?
A house usually can represent both an asset and a liability. The house itself is an asset purchased to either increase in value or otherwise provide some benefit. The loan is taken out from the bank to purchase it is the liability.
Maintenance of the house is another type of liability that could contribute to long-term asset appreciation.
These are very limited examples, so let’s look at the types of assets to help.
Types of Assets
There are four main asset types and one additional type-specific to businesses. There are slightly different labels depending on whether we’re talking about a business or an individual. Let’s split them up, so they aren’t confused.
Individual Asset Types
- Liquid – This type includes things like cash, money market instruments, equities, ETFs, and bonds, which are generally easily convertible into cash on short notice.
- Illiquid Assets – Real estate falls into this category, as things like art, valuable collectibles, and jewelry take some time to turn into cash.
- Tangible Assets – Some things can be in two asset types. For example, art is a tangible but illiquid asset. Cash in your wallet might be on such an asset which is both liquid and tangible.
- Intangible Assets – These are a bit on their own from the other asset types because they include things like intellectual property or even your reputation. While it’s difficult to put a price on a reputation, it is certainly an asset after a fashion that stands the chance of adding value.
Business-Specific Asset Types
- Current Assets – Similar to liquid assets, this includes cash and accounts receivable that will soon be cash.
- Fixed Assets – This includes real estate and equipment, which are long-term.
- Financial Assets – Securities are held by businesses just like individuals, so they are categorized as such.
- Intangible Assets – While this includes IP, just like an individual, a business might hold patents and copyrights that are important to operations.
Asset Definition FAQs
What are the four types of assets?
There are four types of assets: liquid, illiquid, tangible, and intangible assets. A business will use different names, but the concept is roughly similar.
What is the meaning of assets?
An asset is acquired at a cost that will theoretically have either increased value in the future or otherwise provide some added value to the owner or owners.
What’s considered an asset?
However, these are assets in relation to individual owners. Business assets vary somewhat because they will consider anything that helps produce revenue as an asset. They also consider their patents, trademarks, and copyrights as assets in many cases.
What is the meaning of assets with examples?
Assets provide a future benefit to an individual, business, or group. If an individual buys a house, this can be considered an asset. While the house itself would be an asset, it’s important to remember that it must be acquired by taking out a loan.
Bottom Line: Asset Definition
Assets can be a bit confusing at times, especially when trying to decipher exactly what type of asset you are considering. There are really four main types: liquid, illiquid, tangible, and intangible.