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Understanding the asset definition can help you know what financial resources you have and how to build a healthy financial portfolio.
By understanding the asset definition, you can gather all types of financial resources both tangible or intangible. Get your balance sheet or statement of financial position ready and start brainstorming how to build your net worth through a more diverse financial portfolio.
So what are assets? If you're wondering, what is an asset, you need to understand the basic asset definition and the 6 different kinds of asset examples.
Another term you might hear when learning about asset definitions is a financial resource. It is a possession or property that has financial value. They can be owned by an individual, a business, or even a country and add to their overall value or net worth.
What is considered an asset and what isn't? A big part of an assets meaning comes from the kind of resource it is. The following asset examples show how the definition of assets can depend on how it's being used.
Some common asset examples include your house, car, rental properties you own, musical instruments, or anything else you own that can be sold and transferred into funds or converted into cash. Learn the following 6 asset definitions to increase you're overall understanding of financial resources and all they entail.
They are financial resources that you expect to transition into cash flow within the next year. They can also be referred to as a short-term asset or marketable securities. An example might be products you want to sell through your small business.
They are financial resources that you don't expect to convert into cash flow anytime soon, if at all. These can also be referred to as long-term assets. An example might be your home or a boat, which can also be referred to as long-term liability.
They are resources that already take on a financial form. The monetary value comes from a contract or legal claim. The most common examples are stocks, bonds, or bank deposits.
They are resources that don't have a physical form. It can sometimes be harder to evaluate their true value because they don't have a physical form. Patents, copyrights, intellectual property, franchises, and brands are some examples.
They are financial resources that do have a physical form. It is generally easier to evaluate their monetary value because they have physical form. Examples could include product inventory, raw materials, a car, or a house.
If you have ever wondered, is cash an asset? Cash is a liquid asset. These are financial resources that are already available to use, like cash and bank account funds.
Now that you know the 6 asset definitions, we can move onto learning how to manage them. There is a lot of terminology you need to know if you want to get into proper asset management and build your financial portfolio. Asset definitions don't just include different kinds, but they also include terminology to help you manage your resources.
Net Income / Total Assets = Return on Assets
Return on assets, otherwise known as ROA, is the number that shows how much total worth an individual or company has considering everything in their account and their total debts.
Total Sales / (Assets at the Start of the Year + Assets at the End of the Year) / 2 = Asset Turnover
These financial ratios are a formula used to determine the overall value of resources. It can show a business how much revenue their marketable securities are bringing in directly or indirectly so you can measure this against the depreciation expense of necessary operating machinery like a property plant and equipment.
Total Debts / Total Assets = Debt to Asset Ratio
This formula measures how many of your financial resources are financed by creditors rather than investors. Basically, it shows you how much of your finances are leaning on debts.
Businesses and individuals can both invest in asset protection. This is a legal practice used to protect your property from being taken in possible civil money judgments. It can also help keep your possessions from getting seized by creditors.
Asset allocation is when you form an investment strategy. An example is if you want to save up for a car, so you invest some of your car savings in certificates of deposit or short-term bonds to help grow your car savings.
Some people might also have digital resources they need to organize and manage. Companies might hire a digital financial manager to file and organize these digital resources. An individual might use any number of budget apps to manage their digital financial resources.
Accounts receivable are another type of financial resource that includes debts owed to you or the company. Accounts receivable could include purchases made by customers with credit or unpaid loans or IOUs from extending credit. In contrast, accounts payable refers to the money that a company owes to creditors.
A cash flow statement is used to keep track of all the financial resources on the balance sheet or financial statement. It outlines the inward and outward flow of cash. With a cash flow system, you can monitor your financial health, your retained earnings vs costs, and keep track of your owners equity.
Now that you know the answer to what does asset mean, you can start accumulating marketable securities and keeping track of important financial ratios and your financial health on your own financial statement.
