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2 Assets and Liabilities

Statement of Financial Position Fundamentals

Jacqueline Gagnon

Assets

A lightbulb brain in a circle—the 'think' section of the think-see-do approach.

Assets are what you own: cash in the bank, your sneaker collection, a building, land, equipment, T-shirts in storage that you’re planning on selling. There are many, many possibilities here because, like you or me, a company can own many things.

The technical definition of an asset is: (a) a resource controlled by an entity as (b) a result of past events and (c) from which future economic benefits are expected to flow to the entity.

It’s a complicated definition, but we can break it down into small chunks. If we can say yes, that makes sense for this resource to all three parts, then the resource is an asset. Below is a flowchart. Consider a potential asset like cash in a bank account. Is it an asset? Answer the questions below and follow the arrows to find out.

Classifying Assets: A Helpful Flowchart

A flow chart diagram of the decision-making process regarding classifying an entity's resource as an asset. There are three criteria which must be met. (1) Is the Resource Controlled by the Entity? This is important because if a company doesn’t control something, it’s not really theirs. So, an asset might be a bank account under the company’s name, or land where the company holds the land title, or a truck where the purchase invoice says “sold to” the company. Or maybe there’s no paperwork but the company has physical control over the asset (i.e. can decide to sell it or use it). In any case, if an asset is controlled by the company we move to the next part of the definition. If NO: Not an Asset, if YES: move to criterion 2. (2): Does it Result from a Past Event? The most common past event is that a company purchased a resource! Or maybe someone borrowed money from the company (i.e. receivable asset)—this is a past event! If NO: Not an Asset, if YES: move onto criterion 3. (3): Will it Bring Future Economic Benefits to the Entity? For example, investments get interest, we sell our T-shirts for more than we bought them (profit), we use our warehouse to store T-shirts until we need them (the benefit is time—having our goods ready for order). If NO: Not an Asset, If YES to all three questions, then the Resource is an asset. Summary: an asset is a resource which meets the following three criteria: (1) it is controlled by the entity, (2) it resulted from a past event, and (3) it is expected to bring future economic benefits to the entity. If any of the three criteria are not met, then the resource is not an asset.

An eye in a circle—the 'see' section of the think-see-do approach.

What did you find? Is cash in a bank account an asset? Let’s take a look:

Decision Criteria Discussion Criterion Met?
Is the cash in the bank controlled by the entity? Cash in a bank account is controlled by the entity listed on the account, so if the bank account is in our name, then we control it! Checked Tick Box!
Does cash in the bank result from a past event? Yes, the cash got into the bank somehow. Probably we deposited it Checked Tick Box!
Will cash in the bank bring future economic benefits to the entity? Surely the cash in the account will bring economic benefits. For example, the entity could buy inventory to sell, or they could invest the cash to make interest. Checked Tick Box!

Here’s another example. Graphics Co. creates graphic designs on t-shirts using specialized printing press machinery. Is this machinery an asset?

Decision Criteria Discussion Criterion Met?
Is the machinery controlled by the entity? Machinery is controlled by Graphics Co. They can use it however they like. They could use it for t-shirts or sell it. They could, foolishly, destroy it if they like. Checked Tick Box!
Does the machinery result from a past event? Yes. Graphics Co. came into possession of the machinery somehow. Probably they purchased it from a printing press supplier. Checked Tick Box!
Will the machinery bring future economic benefits to the entity? Yes, Graphics Co. expects to receive economic benefits through sales of their t-shirts. The graphic designs printed by the machinery increase the value of Graphic Co.’s t-shirt inventory. Checked Tick Box!
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Mastering Financial Statements Copyright © by Jacqueline Gagnon. All Rights Reserved.

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