The International Financial Reporting Standards (IFRS) has this definition:
a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
Assets are valuable because they can generate revenue or be converted into cash which is of interest to both individuals and businesses. The concept is the same since it is a listing and valuation of the resources held.
An asset is found on the left hand side of the balance sheet, one of the primary financial statements. When it comes to investing along with running a business, the ratio of assets to liabilities is something that many watch. This is something that executives such as CEOs are concerned about. Wall Street analysts often build this into their models.
According to the formula on a balance sheet:
Assets = Liabilities + equity
In public corporations, if there is a bankruptcy, part of the agreement that holders of the stocks have is the entitlement of the assets in liquidation, after payment on all debts, including the outstanding bonds.
Types of Assets
- Current: cash, inventory, accounts receivable
- Fixed: land, building, equipment
This is an asset that loses value over time. It can be vehicles and machinery. This is treated differently for tax purposes. These require the introduction of depreciation to the financial accounting.
Since the introduction of the Internet, digital assets have garnered attention. These can be classified as intangible although it is likely they get their own category as they grow in popularity. This is likely since the digital world is only growing.
Obviously the starting point is cryptocurrency. There are many different forms of this, with others emerging as time passes. They are:
- coins - assets directly tied to a blockchain
- tokens - assets on a particular blockchain but created via a smart contract
- non-fungible tokens (NFTs) - individual assets that are unique
Digital assets are projected to become popular within gaming. This field is already accustomed to in-game tokens and assets. However, they tend to be tied directly to a specific game with not value outside of it. When the game is shut off, the assets disappear.
The next generation of this, under the heading of Web 3.0, is going to allow these assets to be swapped on exchanges. This means that wallet systems operate outside the specific games. It is likely that digital assets become a commodity that ends up in multiple games.
Assets are a vital component in the generation of wealth. Whether this applies to a business or individual, growing one's asset base is vital. Income does not equate to wealth since it can be offset by spending.
Continued accumulation of assets, especially if they increase in value, is what creates wealth. Currency is not wealth since it is a tool that allows business to take place. It is through the application of assets for productive economic purposes that cashflow is generated, something that can result in asset growth.
When people invest, they essentially are buying assets. Going back to wealth generation, this is why investing is such an important part of the strategy.
The same holds true for businesses. They can invest in things such as plants or new market, assets that could translate into greater cashflow.
In the world of investing, assets tend to mean securities. This can come in many forms.