Business assets are an important part of any business. They’re crucial to the functioning of a business, and you can’t do business without them. Assets can be several different things, and their value can depreciate. If you’re running a business, you need to know anything and everything about assets to run your business effectively.
A business asset can be any number of things that are of value to your establishment. Generally, assets can be categorized in one of three different ways.
Tangible Assets - Tangible assets are assets that are physical and are required for your business’s daily activities. This can be a building, furniture, or any other office equipment. These cannot be consumed during the course of business, like printer paper or printer ink. Tangible assets are listed on the business’s Balance Sheet and help assess their market value.
Intangible Assets - These are assets that have no physical form. These are often related to reputation, brand recognition, and industry knowledge. These cannot be listed on the Balance Sheet. If a business’s reputation is damaged, it can affect its performance, which could cause tangible assets to need to be sold to make up for monetary issues affected by the damage.
Intellectual Property Assets - These are a variation of intangible assets and can be documented on paper. These can consist of patents, trademarks, and inventions. They are able to be covered under law for infringement but still can’t be logged on a Balance Sheet.
When assigning value to assets, value can be assigned in several different ways, listed below.
Fair Market Value - This is the most common way of assigning value to an asset. The Fair Market Value is determined by what a seller is willing to sell an asset for and the price at which a buyer is willing to purchase the asset.
Liquidation Value - Liquidation value occurs when a business is forced to sell its assets unwillingly during bankruptcy. This value is lower than Fair Market Value because it is being sold unwillingly.
Appraisal Value - The appraised value is determined by an appraiser and is normally only done when trying to determine the value of an object being used for collateral. Examples of this are buildings and stock.
Obsolescence Value - As with market conditions, which can rise and fall, assets too can lose their value. As they do, they can become obsolete and can lose value entirely. Obsolescence can happen when assets are replaced with newer, better versions of themselves.
Disaster Value - Disaster value is assigned to items after loss due to a disaster. For disaster values to be accurate, the business assets must already have an accurately assigned value from appraisal or according to the Fair Market Value.
Understanding how your assets can be valued can make or break the value of your business.
For the asset to be considered a business expense that can be deducted or depreciated, the asset has to be used. Until the asset has been placed into service, it cannot be deducted, nor can it begin to depreciate. Now, being placed into service doesn’t mean that it has to be used immediately. Being placed into service means that the asset is ready for use and can be used for a specific purpose.
In addition to the three different types of assets listed above, assets can be categorized differently. These are current assets and noncurrent assets.
Current Assets - Current assets are listed as assets that can be turned into cash within the first year of their existence. Examples of current assets are cash, inventory, and accounts receivable. These are all expected to generate cash within their first year. They’re also looked at as short-term assets.
Non-current Assets - These are long-term assets. Non-current assets are expected to generate value for more than a single year. They’re not expected to be sold by businesses and are considered capital for a business. Examples of this are property and equipment.
When buying your assets, the method of purchase doesn’t matter. Purchasing an asset using cash values the asset at the same amount as purchasing it with a loan. The depreciation of the asset also occurs the same, regardless of how the asset is paid for.
Not all assets depreciate in value, some amortize . This is entirely based on the type of asset that is being valued.
Amortization occurs for intangible assets only. Amortization can be applied to patents, trademarks, franchise agreements, and copyrights. The act of amortization refers to applying the cost of an asset over its useful life. That being said, amortization occurs over a straight line for the useful life of the asset, unlike depreciation.
Depreciation occurs for tangible assets or fixed assets. Assets such as equipment, vehicles, buildings, and land can all depreciate over time. The expense of these items can be depreciated in two ways, either regularly or an accelerated basis. Buildings depreciate regularly, as they last for many years before needing to be sold, and the cost is spread evenly over the life of the asset. For assets like vehicles, the depreciation is accelerated, as a vehicle’s use can degrade quickly over the first few years of its life span. The cost is then more evenly applied after the first year or two.
As the business owner, you must know that there are associated risks in running a business and its assets. Business assets can be protected, however. There are plenty of factors that come into play when protecting your assets and how easy or hard it can be to do, but the most important factor to consider is the nature of the asset and if it is dangerous or safe.
Dangerous assets are a bit harder to protect and create a risk for protection by the nature of their liability. These assets tend to depreciate or become obsolete, or the liabilities on them are a high cost. Additionally, these assets pose a risk for the owner to be sued or found liable forr damages that could incur individuals using them. These can include vehicles, commercial property, or necessary tools and equipment.
Safe assets are easier to protect as they do not carry a high risk of loss. While being easier to protect, safe assets are also more appealing to investors when seeking funding. Safe assets consist of cash, treasury bills, and mutual funds. They’re largely based on markets that only appreciate. A tangible asset that is a safe asset is real estate property, as it normally only appreciates in value.
When you’re looking to pursue a business loan, assets can be used as collateral. When putting up assets as collateral, a lien is put against the asset, and the lienholder has first rights to the asset. The loan must be paid off before you can sell the asset and receive any money for the sale of it.
Using your assets can generate income, and generating income relates to the profitability of the company that owns the assets. The total value of your assets, not including inventory, can be weighed against your current liabilities to show how much profit your company can generate and shows its worth.
Assets are essential to businesses , and there are many different ways to determine and analyze those assets. Assets can be tangible or intangible and can consist of physical property or even intellectual property. All of these can be used to determine worth. Furthermore, your assets can be protected , but that can be difficult depending on the asset. Some are considered to be dangerous and more of a liability than safer assets. Assets must be used accordingly because if they aren’t, they may not be valued accordingly. Valuing your assets can be done in various ways, such as determining the fair market value, having the asset appraised, or knowing what it’s worth in the case of liquidation and disaster values. Over time, your assets will depreciate or amortize, and that will affect their value as well. Knowing the value of what you have is everything in business. Understanding your assets and their worth ultimately makes your business worth more in the long run. Sources: Understanding Safe Assets | Investopedia Understanding Dangerous Assets | Investopedia Amortization vs. Depreciation: What's the Difference? | Investopedia