What is an asset?
The next few posts will provide some basic accounting terms and definitions – concentrating mainly on assets.
So what is an asset? If I look at a dictionary, I might see something like “a useful thing” or a “desirable quality”. This may be correct in a general sense, but in accounting we need to get a bit more specific. But before we do that, would you regard something which is useful or desirable as having some value to you? I’ d hope you say yes. Now keep that in mind.
If I look to some accounting rules such as the IASB Framework I get the following:
” An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”
Let’s break that down:
- It is controlled – does this mean you must own an asset. Simply, no, as you can control something, but not legally own it
- It as a result of past events – this means you bought it or somehow acquired it or rights to use it in the past
- Future economic benefits will flow – this means it will be something which directly or indirectly allows the business to make money. For example, an office building does not sell anything (usually) or deliver goods, but without on the business cannot carry on its work to bring in those economic benefits i.e. cash and profits.
So, going back to the general idea I introduced at the start, if you want a very basic tip to identify an asset, think of it as something of value to a business – a truck, a machine, a building, customers you owe money etc,