What are the different types of assets?
Based on their characteristics, assets can be classified into different types. For example, they can be classified into growth assets or defensive assets depending on their investment potential. They can be tangible, if they have physical attributes, or intangible, if they do not.
The main asset categories are current assets and fixed assets. Current assets are assets that can be liquidated in less than a year and can be used for short-term expenses. Examples of current assets are cash and stocks. Fixed assets or long-term assets are assets that cannot be liquidated easily and appreciate with time. Examples of fixed assets are property and equipment.
The process to determine valuation for each of these asset types varies based on their characteristics.
Basics of Types of Assets
An asset is a resource, tangible or intangible, that provides returns over a period of time. Assets are recorded on a company’s balance sheet along with liabilities and equity. A piece of property or a unit of stock is an example of a type of asset. While all assets provide returns, the way they do so depends on their characteristics. For example, stocks provide returns in a shorter period of time as compared to property.
The most important characteristic for any type of asset is liquidity or their ability to be quickly converted into another type of asset or cash. Based on this quality, assets can be of two types.
Current assets are assets that have a ready market for exchange and liquidation. They can be used for daily expenses in the case of an individual and operational expenses for a business. For example, you can generate profits (or losses) through the purchase and sale of stock in less than a week. Similarly, you can also withdraw funds from your investment accounts without any significant delays. The economic value provided by current assets is used to pay current liabilities. For example, cash can be used to pay out dividends.
Fixed assets are assets that are difficult to liquidate in the short-term. But they appreciate in value and provide significant profits in the long term. For example, it takes time, sometimes as much as several years, to sell property. A profitable transaction, however, can generate much more by way of returns than one involving a short-term asset. The economic value provided by long term assets is typically used to pay long term liabilities.
Other parameters are also used to define different types of assets. For example, the utility of an asset is often used to define its type. A property cannot be used in the same manner as stocks. Their time horizons and markets are different and, therefore, a business and individual might use them for different purposes in their portfolio.
Another basis for classification of assets is the presence (or absence) of physical attributes. Certain assets, like land or equipment, have physical attributes; others, like intellectual property and cryptocurrencies, do not.
A separate category of assets is classified based on their investment potential. They are known as investment assets and, depending on whether they are used to multiply profits or generate consistent income, can be categorized as growth assets or defensive assets.
Types of assets
Given below is a classification of some of the most common asset types.
- Tangible assets: Tangible assets have a fixed physical presence and are valued based on their physical attributes. For example, property in a prime neighborhood will be more expensive as compared to property in one that is situated in a depressed area. Similarly, used equipment is less costly as compared to a new one.
- Intangible assets: Intangible assets do not have physical attributes. For example, cryptocurrencies are code and do not have a physical manifestation unlike hard cash. As compared to tangible assets, it is more difficult to determine the valuation and worth of an intangible asset.
- Operating assets: Operating assets are assets that are necessary for business operations and can be employed to meet short-term needs for cash in a business. Examples of operating assets are machinery and equipment.
- Non-operating assets: Non-operating assets are not necessary for daily operations and cannot be liquidated easily to meet short-term cash flow needs during times of emergency. An example of a non-operating asset is land.
- Growth assets: These assets are an example of investment assets. Growth assets appreciate in value and provide income to their owners. Stocks and property are examples of growth assets.
- Defensive assets: Defensive assets are also investment assets and provide income but not from an appreciation in value. They provide interest on principal invested into them. Examples of defensive assets are savings accounts and certificates of deposit.
Valuation of asset types
The valuation of different types of assets differs based on their characteristics. For example, a fixed asset is valued based on its actual cost or market price. But the same approach cannot be used for intangible assets. A patent becomes worthless with advances in technology or market obsolescence.
Valuation of intangible assets is based on the economic value they provide to the owner or their role in maintaining market share for a company. An example of an intangible asset valuation measure is the calculated intangible value (ICV) method in which a bunch of criteria, such as returns on assets and corporate tax rates, are used to calculate ICV.
It is difficult to arrive at a consensus on valuation measures for some asset types, like cryptocurrencies. This is mainly a function of their undeveloped markets and the variety of investors willing to employ a slew of criteria to value them.