Definition of asset: An asset is a contractual right to a future economic benefit. Informally, it can also refer to anything or anyone of value.
What does asset mean?
Said in the simplest way, an asset is anything of value. Whether it can be sold for cash, used to provide a benefit, or perhaps it generates income – this is all value in one form or another.
The word asset is most commonly used in contrast to the word liability. An asset is something owned, whereas a liability is something owed.
If a person or organisation owns more value then they owe, they are said to have ‘net’ assets. In other words, if all the assets were used to pay back the liabilities, there would still be some assets left over.
Investors and businesses prefer to invest in companies with a high asset value because a high balance of assets means that the company has greater resources, and may be more resilient in the face of a period of difficult trading.
When a company runs out of assets, or has more liabilities than assets, it is known as insolvent, meaning that there would be no assets left once the company has settled all of its obligations to others.
Using the word asset in a sentence
Here are some examples of the word ‘asset’ being used in a sentence:
“Yamobyte plc reported assets worth £45.6m in their latest financial statements.”
“Jane is the greatest asset in our organisation”
About this definition of asset
The definition of asset refers to a contractual right. This does not mean that a contract must be signed to create an asset. Any tangible or intangible object which is owned by a person or company is said to be contractually theirs. This is a simple application of the rule of law.
A future economic benefit could include:
- The cash received if the asset is sold
- Royalty income
- Rental income
- The right to operate in a location
- The right to use a brand name
A definition of asset will always be subtlety different depending on the accounting framework which is applied, therefore even the best financial accounting books may have slightly different definitions.
How does the definition of asset relate to investing?
Any investing books you read about fundamental analysis will refer to the financial position of a company, and these descriptions will use terms such as ‘asset’ and ‘liability.’
Assets are one of the main accounting concepts that you will need to understand to be able to analyse a balance sheet.
This is a necessary skill you will use if you applying the strategy of value investing, fundamental analysis or other stock-picking methods.