Asset Classification Meaning Example How To Classify

What is Asset Classification?

Asset Classification Criteria

Classification is done based on specific criteria, as explained below.

A) – Based on Duration Held

Classification based on the duration held is explained below:

These are the assets intended to be held in the business for less than one year. These assets are highly liquid and are expected to be realized within one year. Examples of short-term assetsShort-term AssetsShort term assets (also known as current assets) are the assets that are highly liquid in nature and can be easily sold to realize money from the market. They have a maturity of fewer than 12 months and are highly tradable and marketable in nature.read more include cash, bank balance, inventory, accounts receivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more, marketable securitiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company’s balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.read more, etc.

Long-term assets include fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more (commonly known as property, plant, and equipmentProperty, Plant, And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read more), long-term investmentsLong Term InvestmentsLong Term Investments are financial instruments such as stocks, bonds, cash, or real estate assets that a company intends to hold for more than 365 days in order to maximize profits and are reported on the asset side of the balance sheet under the heading non-current assets.read more, trademarks, goodwill, etc. These are the assets intended to be held in the business for more than one year. These assets are expected to provide benefits to the business for several years.

B) – Based on Physical Existence

Classification of assets is based on their physical existence are, explained below:

Tangible assetsTangible AssetsTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation.read more are those that have a physical existence, i.e., capable of being touched, felt, and seen. Examples of such assets include plant, property and equipment, building, cash, inventory, etc.

Intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more are those kinds that do not exist in physical form. In other words, these assets cannot be touched, felt, or seen. Examples of such assets include patent, license, goodwill, trade name, brand, copyright, etc.

C) – Based on Use

Classification of assets is based on use are explained below:

It refers to those assets that are useful in the conduct of the day-to-day operations of a businessOperations Of A BusinessBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company’s goals like profit generation.read more. These assets help in the generation of revenue and are connected with the core business of the organization. Examples of such assets include inventory, accounts receivable, property, plant and equipment, cash, etc.

These assets are those that are not required in the conduct of the daily affairs of the business. They do not play any role in revenue generation. Examples of such assets include fixed deposits, marketable securities, idle equipment, idle cash, etc.

These are those assets that are not held for sale. Instead, they are held to produce goods or provide services.

It refers to those assets held for further sale in the course of business. Thus, a building will amount to inventory for a real estate dealer, while for other businesses, the same will form part of fixed assets. It depends on the use for which assets are deployed, and the asset cannot be generalized, and instead, it needs to be classified as per its use and other terms.

These are the properties owned, acquired by finance lease, or constructed by an organization for furtherSublease refers to the arrangement where a person, known as the lessee, leases out the property taken on lease from the lessor to a third party to exchange periodic rentals.read more sub-leaseSub-leaseSublease refers to the arrangement where a person, known as the lessee, leases out the property taken on lease from the lessor to a third party to exchange periodic rentals.read more by way of an operating lease to other parties.

It refers to those assets intended to be sold (other than in the course of business) in the present state and condition within 12 months. The carrying amountCarrying AmountThe carrying amount or book value of asset is the cost of tangible, intangible assets or liability recorded in the financial statements, net of accumulated depreciation or any impairments or repayments. Accordingly, the carrying amount may differ from the market value of assets.read more is recovered by way of sale.

These are the assets given under aFinance lease simply refers to a method of providing finance in which the leasing company purchases the asset on behalf of the user and rents it to him for a set period of time. The leasing company is referred to as the lessor, and the user is referred to as the lessee.read more finance leaseFinance LeaseFinance lease simply refers to a method of providing finance in which the leasing company purchases the asset on behalf of the user and rents it to him for a set period of time. The leasing company is referred to as the lessor, and the user is referred to as the lessee.read more to some other person or taken under operating leaseOperating LeaseAn operating lease is a type of lease that allows one party (the lessee), to use an asset held by another party (the lessor) in exchange for rental payments that are less than the asset’s economic rights for a particular period and without transferring any ownership rights at the end of the lease term.read more from other person.

Conclusion

It is essential to classify the assets in the financial statementsThe Assets In The Financial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more properly. Or otherwise, the financial statements may be misleading. Let us consider an example wherein a current asset is wrongly classified as a non-current assetNon-current AssetNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company’s investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.read more. It will result in an incorrect representation of working capital as the same considersCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more. Also, asset classification is necessary to understand which assets help in revenue generation and which do not contribute. It also helps to identify theSolvency of a company means its ability to meet the long term financial commitments, continue its operation in the foreseeable future and achieve long term growth. It indicates that the entity will conduct its business with ease.read more solvency of a businessSolvency Of A BusinessSolvency of a company means its ability to meet the long term financial commitments, continue its operation in the foreseeable future and achieve long term growth. It indicates that the entity will conduct its business with ease.read more. Thus, for financial parameters to be correct, the classification must be correct.

What is Asset Classification?#

Asset Classification Criteria#

A) – Based on Duration Held#

B) – Based on Physical Existence#

C) – Based on Use#

Conclusion#

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