What's an Asset? ...and what's it got to do with a pantry?

Photo by adils photography on Unsplash

In the world of accounting an asset isn't that gorgeous smile of yours nor your wicked sense of humour. The definition is a little more dry - 'Assets are future economic benefits controlled by the entity as a result of past transactions or other past events'.  Still reading? ....Just. But what the heck does that actually mean? 

It can be confusing when you 'buy' an asset because it feels like any other purchase. The three criteria above guide the distinction but generally expenses are less expensive and are used up it in a relatively short period of time - for example a ream of paper in the printer. As a consequence, they are recorded differently in your financial reports. Your ream of paper goes on your Profit and Loss but your computer being an asset doesn't belong there, it belongs on your Balance Sheet (what is now technically called a Statement of Financial Position). You can read more about your Balance Sheet here.

Lets look at the three key parts to the definition:

1. 'Controlled (not necessarily owned) by the business/entity'. In your business, most likely you've purchased it either with funds or via a loan. 
2. Are a 'result of a past transaction'  that is, you have a  computer because of the transaction yesterday or 10 minutes ago that bought it.
3. It has 'future economic benefits' or more simply put it will assist you to earn income. Again, your computer will assist you in doing the tasks (checking emails, fulfilling orders, producing a website, buying supplies etc) that contribute to creating an income. 

There's also some additional criteria that allow it to be 'recognised' (reported) in your financials, but I am trying to not lose you here!

Assets are given what is termed a 'useful life'. This is an estimate of the number of years an asset is likely to remain in service producing income (economic benefits) and the ATO sets guidelines for this. Each year the depreciation of that asset is expensed.

Today more and more of business assets are what are known as intangible assets (as opposed to the more traditional tangible assets). That is they are not real 'stuff' like desks and machinery. Examples are internal systems, staff expertise, brand recognition, intellectual property and social media influence. These are much harder to measure under the traditional definition but are really fascinating (no? that's just me?). 

Which brings me to the pantry analogy. Maybe, just maybe it might help you get your head around it. 

If you open your pantry right now, it's likely to be filled with many 'home assets' ... (unless you've gone all Mother Hubbard!). In there you'll see:
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• Things that you own - your assets. (criteria 1 - tick).
• They're sitting on those shelves as a result of a past transaction when you paid for them at the store. (criteria 2 - tick).
• You can use these assets to create future benefits - meals! (criteria 3 - tick).

What's more they will all have a useful (shelf)life and the particular 'asset' will determine this. For example that opened pack of biscuits might last a week but you might get a year or two out of your plain flour. 

The truth is, like many things in accounting, it's a tad more complicated than your pantry (eg current instant write-off asset rule) but maybe it helps you get your head around it a little . Right. All this pantry talk has got me hungry....I'm off to see what assets I can bite into !

Gabrielle (BAcc) is a small business specialist who loves empowering  creative minds by simplifying complicated financial speak.
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A wife to one, mother of two, Gabrielle is the eternal optimist and lives by the philosophies of Buddhism and Boxing.

​Xero Certified Advisor. 

e: gabrielle@creativeaccounting.online