Individuals and companies manage their assets with different goals in mind. Ariel Skelley/Getty
- An asset is anything that an individual or business owns that has monetary value and can be sold for cash.
- There are four main types of assets: liquid, illiquid, tangible, and intangible.
- Knowing what your assets are and their value is the first step in calculating your net worth.
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When you sit down to calculate your net worth or do a full review of your finances, the first question you’re faced with is: “What are your assets?” In the broadest sense of the word, the answer is: anything you own that has monetary value and can be exchanged for cash.
Assets are owned by either individuals or companies. Whether it’s a manufacturer with equipment that can be resold, or a person with a high-priced jewelry collection, if it’s owned and has value, it’s an asset.
The most important feature of assets is that they can be used as resources to generate income today and in the future.
Understanding how assets work
Accumulating assets can mean you are building wealth or acquiring items of value over time. When the things you own have some sort of value, you can always sell them and pocket the cash, whether you’re a business or an individual. However, the way individuals manage their assets is different from the way companies do.
People tend to keep assets to build wealth so they can retire or use the assets as a financial resource. “An asset in the form of a dividend stock earns ongoing income for its owner and could be sold if needed, freeing up purchasing power,” says Mark Berger, a CFP and Account Executive at Berger Financial Group.
With companies, on the other hand, assets represent items of value that can be used to promote or sustain growth in the business. This could be machinery used for manufacturing, inventory, annual sales, or receivables.
“Assets are listed on a balance sheet to show how they were accumulated,” says Berger. “This helps companies keep track of what they own and can sell either within a fiscal year or what can be sold in the future once its value appreciates.”
Assets are used to calculate your net worth
When you calculate your net worth, the formula is simple: assets minus liabilities. Liabilities are your debts and other financial obligations, while assets are what you own. So for example, if you own a home that is worth $US250,000 ($AU338,068) but you …….