Asset classification definition
/What is Asset Classification?
Asset classification is a system for assigning assets into groups, based on a number of common characteristics. Various accounting rules are then applied to each asset group within the asset classification system, to properly account for each one. The groups are also typically clustered for reporting purposes in the balance sheet.
As an example of how accounting rules may be applied to the assets within a group, all of the fixed assets in the computer software group could be assumed to have the same useful life, to which is applied a standard depreciation methodology. Doing so makes it easier to account for the assets in this group.
Examples of Asset Classifications
Common asset classifications are as follows:
Cash. Includes cash in checking accounts, petty cash, and deposit accounts.
Receivables. Includes trade receivables and receivables due from employees.
Inventory. Includes raw materials, work-in-process, and finished goods.
Fixed Assets. Includes buildings, computer equipment, computer software, furniture and fixtures, and vehicles.
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The Current Assets and Long-Term Assets Classifications
Two broader classifications of assets are the designations of current assets and long-term assets. These classifications are strictly time-based. The current asset designation refers to all assets that will be used within one year. The long-term asset designation refers to all assets that will be used in more than one year. For example, accounts receivable are usually classified as current assets, while fixed assets are classified as long-term assets.
Examples of Investment Asset Classifications
The concept of asset classification can also apply to the different types of investments that a person or entity holds. Examples of these asset classifications are as follows:
Bonds
Cash holdings
Collectibles
Commodities
Equity securities
Real estate