What is an Asset Account? – Definition
An asset is defined as a resource that is owned or controlled by a company that can be used to provide a future economic benefit. In other words, assets are items that a company uses to generate future revenues or maintain its operations.
Assets accounts generally have a debit balance. This means that entries created on the left side (debit entries) of an asset T-account increase the asset account balance while journal entries created on the right side (credit entries) decrease the account balance.
Types of Asset Accounts – Explanation
Pretty much all accounting systems separate groups of assets into different accounts. These accounts are organized into current and non-current categories. A current asset is one that has a useful life of one year or less. Non-current assets have a useful life of longer than one year.
List of Assets Accounts – Examples
Here’s a list of some of the most common asset accounts fond in a chart of accounts:
Cash – Cash is the most liquid asset a company can own. It includes any form of currency that can be readily traded including coins, checks, money orders, and bank account balances.
Accounts Receivable – Accounts Receivable is an asset that arises from selling goods or services to someone on credit. The receivable is a promise from the buyer to pay the seller according to the terms of the sale. This is an unusual asset because it isn’t an asset at all. It is more of a claim to an asset. The seller has a claim on the buyer’s cash until the buyer pays for the goods or services.
Notes Receivable – A note is a written promise to repay money. A company that holds notes signed by another entity has an asset recorded as a note. Unlike accounts receivable, notes receivable can be long-term assets with a stated interest rate.
Prepaid Expenses – Prepaid expenses, like prepaid insurance, are expenses that have been paid in advanced. Like accounts receivable, prepaid expenses are assets because they are a claim to assets. If six months worth of insurance is paid in advance, the company is entitled to insurance (a service) for the next six months in the future.
Inventory – Inventory consists of goods owned a company that is in the business of selling those goods. For example, a car would be considered inventory for a car dealership because it is in the business of selling cars. A car would not be considered inventory for a pizza restaurant looking to selling it delivery car.
Supplies – Many companies have miscellaneous assets that are entire in product production that are too small and inexpensive to capitalize. These assets are expenses when they are purchased. A good example is car factory’s bolts. It’s difficult to account for each bolt as it is used in the assembly process, so they are just expensed.
Fixed Assets – Fixed assets include equipment, vehicles, machinery, and even computers. These assets generally have a useful life of more than one year and are usually more expensive business purchases.
Intangible Assets – Not all assets are physical. Some assets like goodwill, stock investments, patents, and websites can’t be touched. These intellectual assets can be quite substantial, however.
There are many more types of assets that aren’t mentioned here, but this is the basic list. We will discuss more assets in depth later in the accounting course. Right now it’s important just to know the basic concepts.