Not everything in accounting can be treated as assets. Recognition of liabilities, expenses and revenues are having specific recognition criteria. Assets are also having distinct characteristics. In the below section we are discussing some characteristics of an asset.
The Essential Characteristics of an Asset
The following are the essential characteristics of an asset as per Conceptual Framework:
- resource must contain future economic benefits that involves a capacity to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit (NFP) organizations, to provide services;
- control or requiring a capacity to benefit from the asset in the pursuit of the entity’s objectives and an ability to deny or regulate the access of others to those benefits. In other words, The entity can control access to the benefit. For control of access to the benefit to be legally enforceable, it is not necessary for a resource to be an asset because the entity can control its use by other means also.
- past event which giving rise to the entity’s control over future economic benefits
Non essential Characteristics of an Asset :
- purchased at a cost
- asset is not the same as ownership, rather an asset is any form in which wealth can be held
- Assets are generally listed on the balance sheet
- Assets are usually controlled and managed by means of asset tracking tools
- Assets may be classified in many ways (here we will mention two only) like:
A. Based on liquidity :
- Current –> Cash, Receivables,Short-term investments, Inventory, Prepaid expenses etc.
- Non current Assets–>Investments in securities, investments in fixed assets not used in operations, investments in special funds, investments in subsidiaries or affiliated companies
B. Based on Tangibility
- Tangible –>Land, Buildings etc
- Intangible assets –> Patents, Goodwill etc
With the proposed definition of an asset, namely “An asset of an entity is a present economic resource to which through an enforceable right or other means the entity has access or can limit the access of others” there will be less focus on future economic benefits and more on present resource; and less on control, with more on the existence of enforceable rights to limit access of others.