Classification of Assets

1.
EXPLAIN ALL TYPES OF ASSETS AND LIABILITIES
EXPLAIN THE ACCOUNTING EQUATION IN DETAIL WITH AN

EXAMPLE
EXPLAIN THE RULES OF ACCCOUNTING, BOTH TRADITIONAL &

MODERN
An asset is a resource or property having a monetary/economic value possessed by

an individual or entity, which is capable to generate some future economic benefit.
Assets are generally brought in business to benefit from them and to increase the
value of a business. In simple language, it means anything that a person “owns” say
a house or equipment. In the accounting context, an asset is a resource that can
generate cash flows. The assets are recorded on the balance sheet. They are found
on the right-hand side of the balance sheet and can also be referred to as
“Application of Funds”. The assets include furniture, machinery, accounts receivable,
cash, investments, etc. We shall discuss various Types of Assets in this article.
Classification of Assets
Assets are generally classified in three ways:
1. Convertibility: Classifying assets based on how easy it is to convert them into

cash.
2. Physical Existence: Classifying assets based on their physical existence (in
other words, tangible vs. intangible assets).
3. Usage: Classifying assets based on their business operation usage/purpose.
Convertibility
If assets are classified based on their convertibility into cash, assets are classified as either
current assets or fixed assets. An alternative expression of this concept is short-term vs.
long-term assets.
1. Current Assets
Current assets are assets that can be easily converted into cash and cash equivalents
(typically within a year). Current assets are also termed liquid assets and examples of such
are Cash, Cash Equivalents, etc.
2. Fixed or Non-Current Assets

Non-current assets are assets that cannot be easily and readily converted into
cash and cash equivalents. Non-current assets are also termed fixed assets, long-
term assets, or hard assets. Examples of non-current or fixed assets includes Land,
Building, etc.
Physical Existence
If assets are classified based on their physical existence, assets are classified as
either tangible assets or intangible assets.
1. Tangible Assets
Tangible assets are assets that have a physical existence (we can touch, feel, and see
them). Examples of tangible assets includes Land, Building, etc.
2. Intangible Assets
Intangible assets are assets that do not have a physical existence. Examples of intangible
assets include Goodwill, Patents, etc.
Usage
If assets are classified based on their usage or purpose, assets are classified as
either operating assets or non-operating assets.
1. Operating Assets
Operating assets are assets that are required in the daily operation of a business. In
other words, operating assets are used to generate revenue from a company’s core
business activities. Examples of operating assets includes Cash and Stock .
2. Non-Operating Assets:
Non-operating assets are assets that are not required for daily business operations
but can still generate revenue. Examples of non-operating assets includes Short-term
investments , Marketable securities, etc.
A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits. In other words, liabilities are future
sacrifices of economic benefits that an entity is required to make to other entities as
a result of past events or past transactions.
Types of Liabilities
1. Current Liabilities
Obligations which are payable within 12 months or within the operating cycle
of a business are known as current liabilities. They are short-term liabilities
usually arisen out of business activities. Examples of current liabilities are trade
creditors, bills payable, outstanding expenses, bank overdraft etc.
2. Non-current or Fixed Liabilities

Second among types of liabilities is non-current or fixed liabilities; they are
long-term obligations of a business and are not payable within a year or an
accounting period. They are generally used for the purchase of fixed assets.
For example, long-term loans, bonds payable, debentures, etc.
3. Contingent liabilities – are those liabilities that may or may not be incurred by
a business depending on the outcome of a future occurrence. In case the occurrence
does not happen, an organization is not liable to pay anything. They are required to
be disclosed as soon the amount can be estimated and are shown as a footnote to
the balance sheet. Examples of contingent liabilities are
 Lawsuit proceedings
 Product warranty claims
 Guarantee for loans
4. Owner’s funds/Capital/Equity – Last among types of liabilities is the amount

owed to proprietors as capital, it is also called as owner’s equity or equity. Capital,
as depicted in the accounting equation, is calculated as Assets – Liabilities of a
business. It is an internal liability of the business and includes reserves and profits.

Classification of Assets

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1.

EXPLAIN ALL TYPES OF ASSETS AND LIABILITIES

EXPLAIN THE ACCOUNTING EQUATION IN DETAIL WITH AN

EXPLAIN THE RULES OF ACCCOUNTING, BOTH TRADITIONAL &

An asset is a resource or property having a monetary/economic value possessed by

1. Convertibility: Classifying assets based on how easy it is to convert them into

2. Fixed or Non-Current Assets

2. Non-current or Fixed Liabilities

4. Owner’s funds/Capital/Equity – Last among types of liabilities is the amount

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