Asset ClassificationExplained & Defined with Examples

Written By:
Lisa Borga

What is Asset Classification?

Businesses can use asset classification to assign their assets to certain groups that classify the assets according to the characteristics they have in common.

After this, certain accounting rules are assigned to the asset groups to allow for proper accounting of these assets.

These groups also generally appear in the same area of the balance sheet.

Asset Classification Example

There are several common asset classifications, such as:

• Cash: This includes cash in petty cash, the business’s checking account, as well as other deposit accounts.
• Fixed Assets: This would include items such as office furniture, buildings, vehicles, and electronic equipment.
• Receivables: This includes receivables that employees owe as well as trade receivables.
• Inventory: Work-in-process, finished goods, and raw materials are included in the inventory.

Criteria for Classifying Assets

Assets are generally classified based on certain criteria.

There are several different types of criteria that can be used to classify assets.

We will discuss some of these criteria.

The Period of Time for Which the Assets Will Be Held

There are two classifications based on the time assets will be held into which assets are placed.

These are long-term and current assets which are time-based classifications.

Assets that a business will use within a year are classified as current assets.

Whereas assets that a business will have for more than a year are classified as long-term assets.

The Physical Existence of the Assets

When assets are classified based on their physical existence, they are typically classified as either tangible or intangible assets.

Tangible assets are assets that exist physically.

They can be touched or viewed.

These assets would be items such as equipment, cash, factories, inventory, buildings, and property, among others.

Whereas intangible assets do not exist physically.

They cannot be touched or viewed.

These assets include items such as licenses, copyrights, brands, trade names, patents, and goodwill, as well as similar assets.

The Asset’s Use

Assets can also be classified according to their use.

There are many classifications an asset can be placed in when using this criterion.

We will list several of these classifications.

Operating Assets

Operating assets are those assets used in generating a company’s revenue, and that are necessary to the primary business of the company.

Some examples of these assets are factories, equipment, inventory, cash, and accounts receivable.

Fixed Assets

Fixed assets are not available for sale.

These assets are used to provide services or produce goods for the company.

Non-Operating Assets

Non-operating assets are not necessary for the daily operation of the company.

These assets do not contribute to the generation of revenue for the company.

Some examples of these assets are marketable securities, unused equipment, and fixed deposits.

Inventory

Inventory is an asset that is retained by a company in order to sell it as part of its business.

Therefore, an automobile dealer would hold cars, trucks, and vans for inventory.

Whereas other businesses would have different assets as part of their inventory.

Leased Assets

Leased assets are either leased by the business from another business or person or leased to another business or person by the company.

Property Used As an Investment

Investment property is property that the business owns or has leased for the purpose of subleasing it to other parties through an operating lease.

Assets Held By the Company for Sale

These are long-lived or non-current assets that the company intends to sell as part of its business within the next year.

The amount the assets are being carried for will be recovered by the sale.

Final Thoughts

Properly classifying assets is an important part of making financial statements clear and accurate for users.

An example of this would be the problems caused by classifying a non-current asset as a current asset.

This would result in the amount of working capital stated being inaccurate since current assets are a part of the calculation for working capital.

This would mislead investors as to the amount of working capital the company has.

Asset classification is also useful for helping investors and other users of a company’s financial statements to see which assets a company has that are being used to generate revenue.

Additionally, if a company’s assets are classified accurately, it can be helpful in determining the company’s solvency.

Proper classification of assets is essential for giving users of the company’s financial statements an accurate view of the business.