What is an Asset Account? Various Types of Asset Account
Accounts are one of the most critical aspects of running your business. In simple terms, an account is an arrangement for recording and managing balance. All the changes made to the credit get updated in a statement. There are five types of nominal accounts in double bookkeeping, including asset accounts. Businesses use asset accounts to record all the assets a business owns. This article will explain everything you need to know about asset accounts. We will also highlight various types of asset accounts and their examples. So, keep reading the article till the end.
What is an Asset Account?
To understand an asset account, we should know the definition of an asset first. An asset is a resource that holds some value and will own by a corporation, business, or individual. An asset can consider as a resource that will generate some revenue or increase sales in the future. Further, assets can be classified into four different types: current, fixed, financial, and Intangible Assets.
Asset accounts record all the assets a business owns, and it is one of the three significant balance sheets accounts. A debit in an asset account means that a company owes some revenue to others. Meanwhile, a credit in the account means that a business owns more and doesn’t owe anything.
Classification of Assets
In order to know more about various types of asset accounts, it is essential to understand the types of assets. Below is a brief description of different types of assets:
1. Current Assets
As the name suggests, current assets include all the assets that are assumed to be sold or consumed in a particular year. If a corporation has an operating cycle of more than one year, these assets are classified as current. However, the only condition is that the asset should be converted into cash during this operation cycle.
These assets include cash, cash equivalents, prepaid expenses, and inventory.
2. Fixed Assets
Fixed assets, also known as tangible assets, are a piece of property or equipment expected to be sold after at least one year. They cannot be converted into cash in just one fiscal year, unlike current assets.
These assets are recorded as PP&E( property, plant, and equipment) on the balance sheet. Some examples of these assets are equipment, tools, machinery, furniture, and Real estate.
3. Intangible Assets
An intangible asset is something that is not present in physical form. Unlike tangible assets, Intangible ones don’t exist in physical form and are critical for a company’s long-term success. Examples of intangible assets include patents, trademarks, Brand recognition, and Research and development.
Further, an intangible asset is classified as indefinite or definite. Indefinite intangible assets continue for an extended period as long as the company exists. However, a definite asset has a limited life.
See Also: What is a Consumer Finance Account?
4. Operating and Non-operating Assets
A corporation uses operating assets to generate revenue directly in its business operations. Some examples of operating assets include cash, inventory, and real estate. On the other hand, non-operating assets don’t help generate revenues directly by involving in the business operations.
It generates indirect revenue and involves unused land, spare machinery, investment securities, unallocated cash, etc. The income that may generate by a non-operating asset is non-operating income.
Types of Asset Accounts
There are several types of asset accounts, and some of them are listed below:
Cash: It includes currency, coins, cash funds, and cheques.
Land: It represents the total land used in a business. Since the cost of land increases with time, it will not depreciate.
Equipment: All the gears and machinery used in a business are stored in this account. Since kits have a fixed life, it’s the cost, and it is depreciated over their lifetime.
Buildings: In this type of account, the cost of all the facilities used in a business is recorded. Again the price will depreciate as per the life of the building.
Accounts Receivable: Accounts receivable is the money due by the customers who have taken a particular service or goods from a firm.
Inventory: The inventory account includes all the costs of items purchased by a firm that they haven’t sold yet.
Prepaid Expenses: Prepaid expenses are future expenses that a corporation pays in advance. These expenses are first recorded as an asset on the balance sheet, but once the cost expires, it becomes an expense.
Supplies: Supplies include manufacturing supplies, office supplies, or other supplies. Until its expiry, these supplies remain assets to a firm.
Asset accounts hold an essential position while maintaining the records of a corporation or a firm. This article explained the concept of asset accounts by highlighting its examples and several types. With the content of this article, we hope that the idea of asset accounts and their types is clear to you.