What are Business Assets?
Business assets are the backbone of a business since they are the source of all benefits generated by the operation of the business. In this article you will learn the basics of business assets such as, what they are, several examples, what the difference is between the various types of assets, and what benefits they provide for taxation planning.
What is a business asset?
A business asset is a resource owned by a business that is expected to generate or provide a benefit (generally meaning money to the business). An example is how a machine (resource) produces products which are then sold (generates benefits). Business assets are recorded on the balance sheet and can be classified as current, non-current, fixed, financial, and intangible.
Next, we will explain what these types of assets are.
Types of business assets
Current assets can be converted into cash within a year e.g., cash, accounts receivable, among others. On the other hand, non-current assets are those which have a useful life of longer than 1 year e.g., properties, motor vehicles, trademark, investments. Normally, fixed, and intangible assets are non-current assets, while financial assets are generally current assets, next we will explain financial assets in more detail.
Tip: Depending on the type of business, but generally speaking, current assets should always be higher than current liabilities, if not, this would indicate that a company could have liquidity issues.
Financial assets receive their value from a contractual right or ownership claim. Such assets can be cash, stocks, bonds, bank deposits, among others. Financial assets are generally liquid, however stocks of closely held businesses can take more than one year to convert to cash. For this reason, financial asset can be current and non-current assets.
Fixed assets are non-current physical goods such as properties, machinery, and vehicles, among others. One important characteristic of fixed assets is that these can be depreciated over their useful life (the useful life depends on the type of asset i.e., whether it is computer equipment, real estate, etc.). Depreciation is recorded in the profit & loss statement as an expense and is equal to a percentage of the value of the fixed asset. The benefit is that depreciation will reduce your income tax liability.
Tip: Governments will have different incentives when it comes to depreciation. Sometimes allowing for the complete value of a fixed asset to be written-off as depreciation reducing your company’s tax liability significantly.
Finally, intangible assets are non-physical assets which generate benefits for a company, examples of these are goodwill, brand recognition, patents, or trademarks. A benefit of intangible assets is that some can be amortized, this amortization can then be recorded as an expense in the profit & loss statement thus reducing your taxable income. The amortization value is determined based on the useful life of the intangible asset and its value. Determining the value of an intangible asset can be an expensive process that requires a specialist appraiser, however the amount of taxable income reduction via amortization makes it worth any business’ time and resources to do so.
Examples of business assets
Here is a summary of business assets by type:
- Accounts receivable
- Safety deposits
- Provisions for tax liabilities
- Shareholders loans
- Bank deposits
- Motor Vehicles
- Real estate
- Office Equipment
- Leasehold improvements
- Customer lists and relationships