What is the definition of an asset? In layman’s terms, asset can be defined as any material or resource owned by a particular entity that is being utilized for its own gain or advantage. It is everything that could be used in the production of economic goods or services. These resources are fixed assets.
Assets may be fixed or variable. Fixed assets like capital are not affected by the circumstances of supply and demand. They have no scope for variation because they are tied to the specific location, nature and use. On the other hand, assets which are variable are subject to the laws of supply and demand.
Now that you are clear about what is the definition of an asset today, it is time to understand what exactly is the concept of an asset allocation strategy. Basically, this is what determines the allocation of assets between different uses. An ideal asset allocation strategy is one that takes into account how the value of assets directly relates to investment purpose. A good example would be the use of fixed assets as capital assets, fixed income securities and current goods.
When a company implements its fixed assets plan, it would be a very inefficient process to just allow the fixed assets to be stored and not utilized. There would be a negative impact on the overall performance of the firm. The firm will end up losing much less than if the same amount of fixed assets is allocated to variable. Therefore, a company should make a conscious effort to make the best use of their fixed assets. The best way to do so is to divide the fixed assets into four categories.
The first category of fixed assets is equities. These can include common stocks, preferred stocks. When talking about what is the definition of an asset, we must also discuss what are the risks associated with equities. If the company’s equity increases, then the dividends earned from the equity will also increase. However, if the same company is facing bankruptcy, the dividends earned will decrease.
Another category of fixed assets is the fixed equipment. This could also be equities or fixed capital. The fixed equipment has no direct relation with the productivity of the firm but still, there are some risks involved with these investments. Some of the equipment are long-term in nature, which means that their purchase cost will increase over time.
The third category of fixed assets is the intangibles. This could also include the knowledge base or the innovation process. A firm’s success is heavily reliant on the knowledge base. Therefore, when we talk about what is the definition of an asset, we should also include the human resource. This is because human resource will greatly affect how the firm will run as well as its ability to create new knowledge.
Thus, when answering the question, what is the definition of an asset, it would be safe to say that the three main categories of assets are tangible, non-tangible and intangibles. The tangible assets include accounts receivable, accounts payable, inventory and the intangibles will include the work force and the production process itself. In most cases, the firms will have an extensive portfolio of assets. There are a few firms which would only focus on one or two categories of assets.
Now that we already know what is the definition of an asset, we should now move into a discussion about what kind of assets a firm can create. Well, the answer would vary depending on the size of the firm. If a firm has a small amount of capital, it will not be able to create large-scale assets.
The definition of assets will also differ if the firm is big or small. The size of the firm will determine the possible scope of the firm. A huge firm can create assets which can be sold or exchanged. On the other hand, a medium-sized firm can create assets which can be used for short-term requirements. In other words, a firm should be able to define the assets it would like to create and determine which ones will be useful in future.
It is important to define an asset even if the definition is only a broad outline. For instance, a firm should never take the position that the purchase of raw materials would be considered an asset. Such an action would be considered as inappropriate since there would be no way of knowing what the value of these raw materials would be in the future. Instead, such a commodity should be bought in the anticipation of its increase in value. Again, this would be a valuable commodity that a firm could sell in the future.