An asset describes an item of financial value that’s expected to generate a benefit to the owner in future. A business with a huge number of assets is typically more valuable than a business with fewer assets.
However, asset acquisition needs capital, which is costly. These resources can produce cash flows and are usually on the right hand of a balance sheet. For an in-depth look at assets, check this out.
Types of Assets
Illiquid vs. Liquid Assets
Liquid assets are those you can convert into cash fast without affecting their value. On the other hand, an illiquid asset loses its value when converted fast.
A liquid asset includes stocks and government bonds while an antique is an example of an illiquid asset. You can’t sell illiquid assets quickly due to the lack of ready and eager investors. The lack of willing buyers also leads to bigger discrepancies between the bidding and asking price.
Tangible vs. Intangible Assets
Tangible assets are those you can see, feel, and touch. You’ll find that fixed assets are tangible. Additionally, some current assets such as cash and inventory fall under this category.
While these assets are a company’s backbone, they face the risk of damage from theft, naturally occurring events, or accidents. The two kinds of tangible assets are fixed and current. A company can use current assets to save it from debt issues or as financial aid.
On the other hand, fixed assets describe physical items that a business won’t sell at any point. They include equipment, land, or machinery and are necessary to operate a business continually.
Intangible assets are nonphysical, for instance trademarks, franchises, and patents. Depending on the kind of business, these assets may include licensing agreements, trade secrets, and blueprints.
Categories of Assets
The three main asset categories are:
Historically, stocks have had the highest returns and greatest risk among the three categories. These assets are volatile, making them a risky short-term investment.
Although cash and cash equivalents such as treasury bills and savings deposits are the safest investments, they provide the lowest return of the major categories.
It’s important to note that you’re less likely to lose money if you invest in this category. The major concern for investing in cash equivalents is inflation risk, which describes the likelihood that inflation will erode and outpace returns over time.
Generally, bonds are less volatile compared to stocks but their returns are more modest. Consequently, an investor approaching an economic objective might increase his or her bond holdings relative to stock holdings since the decreased risk of holding additional bonds would be lucrative to the investor in spite of their lower growth potential.
You should bear in mind that some bond categories provide high returns like stocks. However, these bonds, termed junk or high-yield bonds also have a higher risk.
Advantages of Asset Allocation
Asset allocation describes an investment strategy where investors set aside a certain proportion of their money for several kinds of asset classes. As a result, they might invest part of their money in stocks or bonds. This investment strategy offers these benefits:
One of the major goals of investing is portfolio diversification. Asset allocation permits investors to diversify according to stipulated rules.
This strategy ensures that you don’t put all your eggs in one basket. Therefore, if one asset type shows poor performance, you have other assets to bring up the portfolio’s performance.
Numerous people use this strategy for retirement preparation. It makes sense to invest in various stocks when you’re younger. However, your portfolio should be more conservative when you’re close to retirement.
Obtaining and growing your assets is important. However, understanding assets and capitalizing on them is vital to a strong foundation.
Dailey Bookkeeping Services is a Xero Certified SILVER Partner and a QuickBooks Online Certified Advisor, so if we can help you with your asset needs, just give us a call, we would love to help you! The owner, Jacqueline Dailey is a Certified Public Bookkeeper, an Advanced Certified QuickBooks and QuickBooks Online ProAdvisor, a Sleeter Group Certified QuickBooks Consultant and a Xero Certified Silver Partner. We work remotely so we can work with any company located in the U.S. If we can help you with this process or provide you with custom reporting, please give us a call. If we cannot help you, we will refer you to someone who can! Feel free to visit our website at http://www.