Ask an Accountant: What is a Business Asset?
Whether you need to know for tax reporting reasons or just because you’re curious, here’s a definition of what is a business asset.
Running a business needs the appropriate resources to manufacture products or offer services. For example, if you own a home, you need a lawnmower, leaf blower, weed trimmer, and a pair of gloves to keep the lawn in good shape. Likewise, your business needs the right assets or tools to operate.
As a business owner, whether for tax reporting or curiosity, you may ask yourself, “What is a business asset?” It is defined as a resource of value that you lease or own that helps run your business. It could be tangible, such as petty cash and computers, or intangible, like reputation and brand.
In accounting terms, an asset is a resource you convert to cash or use to produce value. Therefore, asset accounts are important to the business balance sheet and fall into different categories that depend on how you view them.
Types of business assets
Business assets in the balance sheet are divided into non-current and current assets. Current assets are those that your business converts into cash within a year, such as inventory, cash, marketable securities, and receivables. Non-current assets are long-term, as they are less liquid and are expected to offer value for more than one year. They include buildings, property, and equipment.
Determining the value of assets
The value of assets is not always its original cost. To determine the value of your assets, consider factors like depreciation and fair market value (FMV). The FMV is how much the asset can sell in the market. It can be higher, equal, or lower than the original price. To find the asset price, conduct a market value analysis. Then, collect information on the asset and compare it to others in the market. You can also consult an accountant to help value your assets.
Intangible assets are amortized by spreading the value over their useful life, while tangible or physical assets depreciate. You calculate depreciation by subtracting your assets’ resale value from the original cost. Then, the difference is divided by the assets’ useful life.
Recording your assets in the balance sheet
Business assets are valued and itemized on a balance sheet found in the company’s annual reports. They are listed by their historical costs rather than the market value and are on the balance sheet or statement of financial position as an ownership item.
For higher accuracy, update your balance sheet more frequently. When reporting assets in the balance sheet, you must record them in descending order, considering their liquidity. More liquid items are easier to convert to cash and are recorded first. The most liquid current assets are higher up the balance sheet while the fixed assets are way below.
If you’re looking for an experienced accounting partner who will help take your business to the next level, contact us for more information. Visit our blog for more articles, news and updates about small business accounting, tax planning, CRA audits and bookkeeping.
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