An asset is a resource owned by an entity from which economic benefits are expected to flow to the entity. It can be tangible as well as intangible.
What Qualifies As An Asset?
There is a proper recognition criterion for assets laid by International Financial Reporting Standards. IFRS states that an asset qualifies for recognition if:
- It is controlled by the entity
- It is expected that future economic benefits will flow to the entity from using the asset
- Its cost can be measured reliably
For example, a company buys a car for $2000 to deliver goods to its customers, it is an asset because it fulfills the criteria. The cost of the car can be measured reliably, it is owned by the company and it provides economic benefits to the company.
Assets are primarily divided into TWO types. Current assets and non-current assets. Current assets are short-term assets of a company meaning that they have a life span of no more than 1 year such as inventory, cash, receivables etc…
Whereas, non-current assets are also called long-term assets for which the full value will not be realized within the accounting year. They are further divided into 2 types.
- Tangible Assets: Assets with physical existence such as machinery, land, building, etc…
- Intangible Assets: Assets that cannot be touched such as goodwill, license, patents, etc…
Bottom-Line
To count an item as an asset, it must be owned by the entity and the entity must be able to reliably measure its cost. In addition, there should be a probability of expected future economic benefits.
What Is the Future Economic Benefit of an Asset?
Future economic benefit refers to the value that an entity expects to derive from using an asset in its operations. Specifically, it is the portion of cash inflows that occurs as a result of employing the asset. For example, a machinery’s economic benefit is the number of units it produces or the reduction in production hours, etc…
Each class of asset performs different functions and therefore, the calculation of economic benefits varies across different asset classes. Generally, the economic benefit of an asset can be calculated as;
Expected cash inflows each year X Number of years X appropriate discount rate.
While the above equation can be used to calculate the economic benefits of an asset, it could get complicated sometimes in which case advanced formulas are used. Below is an example that explains how complicated it could get.
About the Recognition Criteria of Assets
Recognition criteria refer to the criteria that should be met in order to classify an item as an asset or a liability. In terms of assets, it is the above conditions of reliable cost measurement, ownership of the asset, and probability of economic benefits. If an item meets the criteria, it is then classified as an asset and recorded in the balance sheet of the company.
When an asset is first recognized, it results in the following double-entry.
| Asset | Debit |
| Cash/Bank | Credit |
Article Sources
- https://journals.sagepub.com/doi/abs/10.1177/0165551512463648
- https://www.sciencedirect.com/science/article/abs/pii/S0308596114001116
