Assets - American businessAssets are revenue-generating resources owned by every firm. It is impossible for a firm to earn (generate) revenues without owning and using its assets.
Assets are divided into current assets and long-term assets. Current assets, which are the more liquid assets that a firm owns, have useful lives of one year or less. Examples of current assets are cash, accounts receivable, merchandise inventory, supplies, various prepaid expenses such as prepaid rent and prepaid insurance, and short-term investments.
Long-term assets are less liquid and have useful lives greater than one year. In other words, their useful lives will span several, if not many, accounting periods, and they are expected to generate revenues for the firm over many accounting periods. There are three classes of long-term assets: man-made assets (such as plant and equipment); natural resources (such as timber tracts, mineral deposits, mines, and oil wells); and intangible assets (legal rights and privileges such a patents, copyrights, trademarks, logos, franchises, and goodwill). Assets are increased by debits to those accounts and decreased by credit entries (see debit, credit).
In terms of the accounting equation assets = liabilities + owners equity, the assets are the uses of the firm’s capital. The liabilities and owners’ equity are the sources of the firm’s capital. Thus, the left and right sides of the accounting equation must always be in balance.
Because assets are used in the generation of a firm’s revenues, most are transferred to expense over their useful life. While supplies reside in inventory, they are classified as assets (supplies inventory). When those supplies are used, their cost is classified as an expense (supplies expense). Likewise, when machinery is used, it is depreciated. When natural resources are used, they are depleted. When intangible assets help to generate revenue, they are amortized (see amortization).