In the world of accounting, the term “assets” is known as wealth owned by a company when carrying out its operational processes. The value of these assets is always evaluated and included in financial reports later. So accountants must clearly understand the various types of assets in the world of accounting.
Company assets consist of three types. Namely fixed assets, current assets and non-fixed assets. The various types of assets are different and have their own meanings. If you want to become an accountant, be sure to recognize the different types of assets. In this article, we will discuss one by one the differences between these assets and their meanings.
A. Difference between Fixed and Non-Fixed Assets
1. Definition of Fixed Assets
Fixed assets are property owned by a company that can later be used to earn income. This type of asset is very long-term in nature, and is not expected to be sold for a long time. The minimum sales process is estimated to be no less than 1 year.
If you think that fixed assets are the same as inventory (items like tables, chairs, etc.), you are wrong. Fixed assets are items that are very important to the company and will only be purchased or rented once in a period of several years.
2. Characteristics of Fixed Assets
Usually a company buys fixed assets for its own use or to lease to other parties. And the term “fixed” in fixed assets usually refers to the unsold condition of an item in one accounting period.
The characteristics of fixed assets are as follows:
- Can shrink / have depreciation value (for tangible assets)
- Can depreciate / have amortization value (for intangible assets)
- Has an impairment if it is below the net book value
- It is dispositional if the asset is disposed of
If a fixed asset is disposed of, it must still be recorded in the cash flow statement. Even if the asset is disposed of, it will no longer have any use. So, to find out the various criteria for fixed assets, here is an explanation:
2.1 Assets that have a useful life of more than one year
First criterion: fixed assets always have a useful life of more than 1 year. This type of asset usually appears in the Property, Plant, and Equipment or PP&E section if recorded on a company’s balance sheet.
2.2 Depreciable Assets
Second criterion: fixed assets are subject to depreciation. This is because fixed assets reflect wear and tear as well as depreciation when the assets are continuously used.
2.3 Assets that are used in business operations and provide long-term financial benefits
Another criterion for fixed assets is that they can provide benefits from the income earned by the company. Usually this type of asset will not be sold because it is used as a business investment vehicle.
2.4 This Asset is Illiquid
Another criterion, fixed assets are a type of asset that is completely illiquid. In other words, if the company requires payment for an expense, fixed assets will not be used as a means of payment. Apart from that, this asset cannot be easily converted into cash.
3. The Importance of Fixed Assets
All companies will definitely need fixed assets that can be used to help them obtain income or income. If the fixed assets are used properly and correctly, the company will definitely gain a competitive advantage.
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4. Examples of Fixed Assets
Now, after knowing the various descriptions related to fixed assets, you need to know examples of fixed assets. The following are various examples of fixed assets that you need to know:
a. Land
Land owned by a company that will increase as time passes. This land is usually written at a fixed value on financial statements.
b. Machine
Company machines have an accumulated depreciation value, and can break down requiring routine repairs and maintenance costs.
c. Building
The value of company-owned buildings can also increase. However, a building can experience damage that causes costs.
d. Vehicle
Just like engines, vehicles can also decrease in value. Moreover, official vehicles also require fuel costs as well as repairs and maintenance which can burden financial reports.
e. Furniture
The value may also decrease, but will require less repair costs.
These are various examples of fixed assets that are usually owned by companies. However, the interpretation of fixed assets can be different for each company, depending on the position of these fixed assets in the company’s production activities.
5. Relevance of Fixed Assets in Financial Reports
A fixed asset can be interpreted in many ways in a company’s financial statements. This relationship varies depending on the type of financial report of each company. The following are various types of relevance of assets or fixed assets in company financial reports.
a. Balance sheet
Regarding the financial balance, companies prefer to record costs as assets on the balance sheet rather than putting them on the profit and loss statement (L/R). This is due to the nature of fixed assets which can bring profits to the company.
Initially, fixed assets are capitalized on the balance sheet, and then a gradual depreciation value is applied over the period of their use. You can record the company’s balance sheet in the PP&E (Property, plant and equipment) section.
b. Income statement
In the income statement , fixed assets always experience depreciation except for company land. Later, the profit and loss report in the fixed asset depreciation column will reduce the company’s net profit.
c. Cash flow statement
The process of purchasing assets or fixed assets will still be in the investment activities section of the cash flow statement. Later the purchase of assets will be classified as capital expenditure. Meanwhile, sales of fixed assets will be included in the proceeds from the sale of fixed assets.
Learn how to make financial reports for a company through the book Easy Ways to Prepare Financial Reports for Service Companies which consist of profit and loss reports, changes in equity reports, cash flow reports, and many more.
6. Definition of Non-Fixed Assets
Non-fixed assets are also called intangible assets. This type of asset can also be called an intangible fixed asset, which can still be identified but has no physical form. This type of asset can usually be owned for other administrative purposes.
For companies, the benefits from these intangible assets can be obtained over a long period of time, and their value is very large compared to the capital they own.
7. Criteria for Non-Fixed Assets
To be able to identify whether an asset is included in non-fixed or intangible assets, make sure to recognize the various characteristics of intangible assets. Intangible assets or intangible assets can be recognized by various characteristics as follows:
- Not tangible, cannot be seen directly. It can also be seen in the form of a document stating that company A has intangible assets in the form of “B”, and so on.
- It is not a financial instrument that can be used to make payments for company expenses directly.
- Usually this type of asset is in the form of a document whose value can be claimed over a long period of time.
- Assets that are long-term and have a relatively long useful life for the company. Usually the process of disbursing this intangible asset must comply with applicable law.
8. Types of Intangible Fixed Assets and Recording of Intangible Assets
Various types of intangible assets include:
Franchise : the right to sell a brand to another party so that they can carry out business on behalf of that company.
Goodwill : which is a condition where there is an overpayment for an asset compared to the market value. The value of goodwill is taken from the difference between market value and the money paid for certain assets.
Brand rights : namely a certain company’s authority regarding the brand they have registered.
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B. Difference between Current and Non-Current Assets
1. Definition of Current Assets
Apart from fixed assets, we also know current assets in the world of accounting. Current assets are the term for assets or wealth owned by a company that can be converted into cash. In other words, current assets are assets that can be measured in currency units.
2. Examples of Current Assets
Current assets are also known as assets that can be liquidated at any time. The following are various examples of current assets:
a. Cash _
For a company, cash can be referred to as cash or company cash. “Cash” is a term for company cash, while “Bank” is a term for company money that is in a bank account.
b. Securities
Securities include current assets which are usually used as proof of ownership of valuable assets. This type of letter can be traded with other parties and exchanged for cash. Some examples of company securities are deposits, bonds, shares, notes, and so on.
c. Receivables
Company receivables also include current assets, which are bills owed to customers who purchased goods from your company on credit. The receivables process is usually promised to be repaid within a certain period of time. This process will usually be paid off at a certain time by both parties.
d. Supply
Inventory is the number of goods that have not been sold and also has economic value. This current asset is a type of asset that can later be sold directly and converted into company cash.
f. Prepaid expenses
Another type of current asset is prepaid expenses, so that they will not burden the company’s finances at the end of the period. This type of cost will later be carried out by the company without burdening cash.
3. Definition of Non-Current Assets
Other types of assets besides current assets are non-current assets. This asset is important for the company, because it cannot be converted directly into cash. In other words, this type of asset has quite complicated recording techniques in the company’s financial reports. Apart from that, the process of reselling this type of asset will be quite long. The following are various types of company non-current assets:
3.1 1. Fixed Assets
We discussed fixed assets at the beginning of the article above. In essence, fixed assets are assets that are used by the company to carry out the production process but have a fixed form. This type of asset is long-term in nature, and will not be traded for a long time.
For example, land from company buildings will not be sold for decades. Apart from that, various machines, equipment, furniture and vehicles belonging to the company will not be sold to ensure the company’s production process runs smoothly.
Usually companies will sell this type of asset when they are on the verge of bankruptcy or really need money urgently. A company that sells its various fixed assets can be said to be a company that is in an unprofitable situation.
3.2 2. Intangible Assets
Another type of non-fixed assets is intangible assets. The form of intangible assets cannot be seen, but the benefits will be obtained by the company for a long time. This type of asset is quite special, because the benefits can only be felt and the company doesn’t need to bother storing physical goods.
Various examples of intangible assets are:
- Copyright, Patent, Trademark
- Contract rights, partnership/franchise rights, and also goodwill (certain privileges for the company)
- These various examples of assets are intangible, but can bring benefits in the long term.
With the development of information and digital technology, we can see that many companies are no longer based on fixed assets but have high value because of the support of these high levels of intangible assets. However, how to assess these assets? Learn about this in the book Valuation of Banks, Insurance and Intangible Assets.
3.3 3. Long Term Investment
Another example of intangible assets is long-term investments made by the government. This type of asset can bring profits to the company over a long period of time, and the results cannot be known quickly. Examples of types of long-term investment assets are bonds, government debt securities, shares, and so on.
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4. Difference between current and non-current assets
Have you ever felt confused about differentiating between current assets and non-current assets? Usually the types of assets are not easy to distinguish and make accountants feel confused when preparing financial reports. The various differences between current assets and non-current assets are:
a. In terms of time
An easy way to differentiate current assets from non-current assets is in terms of their time period. The time aspect discussed is the time used to convert the asset into cash. In other words, an asset can be said to be a current or non-current asset based on its ability to “transform” itself into cash that the company needs.
An asset is declared a current asset if it can be converted into money in less than 12 months. Meanwhile, these assets are included in non-current assets if they cannot be changed within a period of less than or equal to 12 months.
b. In terms of goals
Another way to differentiate between current assets and non-current assets is in terms of their purpose. The purpose of purchasing an asset can affect the status of the asset, whether it is called a current or non-current asset.
If the purpose of purchasing these assets is to use them as a means of financing the company’s operational activities, these assets will be referred to as current assets. Meanwhile, if assets are purchased with the aim of storing them or supporting the production process for a long period of time, these assets will be referred to as non-current assets.
c. In terms of benefits
After that, the way to differentiate between current assets and non-current assets is in terms of benefits. Current assets have the benefit of making direct payments for various expenses used for company production. Meanwhile, non-current assets have the benefit of only being collateral when you want to borrow money from another party (collateral in nature).