The Definition of Assets in Accounting

In our previous lesson we were introduced to the basic accounting equation and its three elements: assets, liabilities and owners equity.

In this lesson we're going to learn the full definition of assets in accounting, when to recognize something as an asset and how to value them.

The Official Asset Definition

A Simpler Definition

Asset Recognition Criteria in Accounting

In accounting we have specific criteria which need to be fulfilled in order to recognize an asset in our accounting records.

FYI, with assets we're talking about spending on things which will provide us continuing benefits into the future. But did you know that we can also spend on things which provide us only immediate benefits? These are what we call expenses.

See the lesson on The Basic Accounting Equation - Another Viewpoint to learn about the difference between assets and expenses.

Examples of Assets

Here are a few asset examples. Let's see if they meet the recognition criteria above.

Property

Well, do you expect to receive benefits for your business in the future from the land?

Equipment

Well, amongst other things, you can store and retrieve large amounts of information and use it to communicate with suppliers and customers.

Vehicles

Cash

Now let’s take something more tricky – what about cash? Is cash an asset?

Simple: you can pay for things! That is certainly useful (and indeed essential) for a business.

Debtors (or Accounts Receivable)

The word receivable simply means "capable of being received," or "will be received."

Answer: In the case of debtors, we don't own the debts to us, but we do control them (we have the enforceable right to claim these funds owed to us).

Additionally, we will get benefits in future from having this money owed to our business. The benefits are simple – we'll get paid!

So if you have $3,000 owed to you by Mr. Smith, you have a debtor, an asset, worth $3,000.

Asset Definition - A Final Criterion

This is usually quite simple, as the value is equal to how much you paid for it.

Now, in our definition of assets above we said that an asset is anything that will add future value to your business.

Wouldn't they qualify under this definition? I mean, employees definitely add future value to a business - they get the work done!

Can you put an accurate, reliable figure on how much an employee is worth to you, bearing in mind that he or she can resign at any point?

As you can imagine, it's nearly impossible to place a value on people – consequently employees are actually never included as assets in accounting - but only because we can't really value them.

The Full Test for an Asset in Accounting

If these three criteria are met, then you have an asset that you can recognize according to the accounting system.

Asset Valuation

The cost of an asset includes all costs necessary to get it to the business premises and into a condition in which it can be sold (or used).

So the cost of an asset can include not only the purchase price, but also the following:

Test Yourself!

Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.

Important: The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.

I hope you now have a much better idea of what an asset is and when we can recognize one in our records.

Questions Relating to This Lesson

Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)

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