Asset Definition | What Are Assets and How to Use Them

July 9, 2021

Asset Definition | Check City BlogWhether you realize it or not, everyone has assets of some kind. The very clothes on your back could be considered an asset. Anything you own is a personal financial asset or resource. 

Asset Definition

Another term for an asset, or an asset synonym, is a financial resource. 

An asset is a resource that has potential financial value. They can be owned by an individual, a business, or even a country and add to the overall value or net worth of an individual, corporation, or country. 

Assets are often resources that aren't used in the present. Instead, assets are resources you keep, grow, and accumulate for a potential future time when you might need it. Assets are useful because they can provide a cash flow in case of an emergency or sudden need for funds. 

What Are Assets?

Assets are any kind resource that can be turned into lucrative wealth, funds, or cash. Some common asset examples include your house, car, rental properties you own, expensive guitars, or anything else you own that can be sold and transferred into funds. 

Assets come in a few different categories: 

Current Assets

Current assets are financial resources that you expect to transition into cash flow within the next year. In other words, a current asset is a short-term asset. 

An example of a current asset, or a short-term asset, might be products created by your business or company. 

Fixed Assets 

Fixed assets are financial resources that you don't expect to transition into cash flow anytime soon, if at all. Fixed assets can also be referred to as long-term assets. 

An example of a fixed asset, or a long-term asset, might be your home or a boat. 

Financial Assets

Financial assets are resources that already take on a financial form. The monetary value of a financial asset comes from a contract or legal claim. 

The most common examples of financial assets are stocks, bonds, or bank deposits. 

Intangible Assets 

Intangible assets are resources that don't have a physical form. Because intangible assets don't consist of physical items, it can sometimes be harder to evaluate their true value. 

Patents, copyrights, franchises, and brands are some examples of intangible assets. 

Liquid Assets

What are liquid assets? Liquid assets are resources that can easily be changed into cash funds. In general, a person's liquid assets refer to funds they already have available to use, like cash and bank account funds. 

Asset Management

Assets need to be managed. You manage your liquid assets every day when you budget your income and make monetary plans for the future. When you make plans to buy and finance a house you are managing fixed assets. 

Asset management is important if you want to grow your assets and your net worth. Smart asset management will allow you to accumulate more wealth and prepare yourself for emergencies and the future. 

Return on Assets (ROA)

Return on assets, otherwise known as ROA, is the number that shows how much total worth an individual or company has considering all their assets and their total debts. 

Understanding ROA can help a company understand how well they are using their assets to generate more revenue.

The higher your ROA, the more efficient you are at managing your assets and using assets to grow more wealth. 

Return on Assets Formula:

Return on Assets equals Net Income divided by Total Assets. 

OR

Return on Assets = Net Income / Total Assets

ROA Example:

If you put $1,500 into your business and earn $150 from that same business, then you'll have a ROA efficiency rate of 10%. Compare this ROA percentage to other similar businesses to see how well you are managing your assets. 

10% = $150 / $1,500

Asset Turnover Ratio

The asset turnover ratio is a formula used to determine the overall value of a company's assets. The asset turnover ratio can show a business how much revenue their assets are directly or indirectly bringing in. 

Asset Turnover Ratio Formula:

Asset Turnover equals Total Sales divided by Beginning Assets and Ending Assets divided by 2 

OR

Asset Turnover = Total Sales / (Assets at the Start of the Year + Assets at the End of the Year) / 2

Asset Turnover Ratio Example:

Say you have $500 in assets at the beginning of the year, $400 in assets at the end of the year, and you earned $2,000 total in sales that year. Then your asset turnover ratio would be 1.11. 

1.11 = $2,000 / ($500 + $400) / 2

Debt to Asset Ratio

The debt to asset ratio formula measures how many of your assets are financed by creditors rather than investors. Basically, the debt to asset ratio shows you how much of your assets are leaning on debts. 

Debt to Asset Ratio Formula:

Debt to Asset Ratio equals Total Debts divided by Total Assets 

OR

Debt to Asset Ratio = Total Debts / Total Assets 

Debt to Asset Ratio Example:

For example, if your company has $50,000 in debts and $90,000 in assets then your debt to asset ratio would be 0.56. 

0.56 = $50,000 / $90,000

Asset Protection

Businesses and individuals can both invest in asset protection. Asset protection is legal practices used to protect your assets from being taken in possible civil money judgments. Asset protection will keep your assets from getting seized by creditors, except in serious cases like perjury or tax evasion. 

Asset Allocation

Simplified, asset allocation is when you form a strategy to invest your assets. You need an understanding of risk and reward when setting up a strategy for asset allocation. 

An example of asset allocation 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. 

Digital Asset Management

Some people might also have digital assets they need to organize and manage. Companies might hire a Digital Asset Manager to file their digital assets. 

An individual might use any number of budget apps or other financial portfolio apps to manage their assets and investments digitally.