Definition of Assets

Assets are all properties and resources owned by a company or institution that have a specific economic value measurable in monetary units. Assets are characterized by being under the company's control and are expected to generate cash flows or economic benefits in the future. Assets can be tangible such as buildings and machinery, or intangible such as trademarks and patents. Assets are recorded on the left side of the balance sheet and represent what the company owns in terms of economic values that can be converted to cash or used in operational activities to achieve profits.

Types of Assets

Assets are divided into several main classifications based on their nature and duration of use. Understanding these classifications is very important for business management and financial planning. The following are the most important types of assets:

1. Current Assets

These are assets that can be converted to cash within a short period (usually one year or less) and include:

• Cash and Cash Equivalents: Money available in the cash box and bank accounts
• Accounts Receivable: Amounts due from customers from credit sales
• Inventory: Goods, raw materials, and work-in-progress products
• Short-term Investments: Securities that can be easily sold

2. Fixed Assets

These are long-term assets used in operational activities for more than a year and include:

• Land: Land plots owned by the company
• Buildings: Offices, factories, and warehouses
• Equipment and Machinery: Devices used in production
• Transportation: Cars, trucks, and mobile equipment

3. Intangible Assets

These are assets that have no physical form but have economic value and include:

• Patents: Exclusive rights to inventions
• Trademarks: Registered company and product names
• Copyrights: Intellectual rights to literary works and creative productions
• Goodwill: Additional value resulting from the company's reputation

4. Long-term Investments

These are financial assets held by the company for long periods and include:

• Shares in Other Companies: Investments in company capital
• Long-term Bonds: Investments in debt instruments
• Investment Properties: Properties designated for investment rather than use

Assets Subject to Depreciation

Assets subject to depreciation are tangible fixed assets that lose their value over time due to use or obsolescence, such as buildings, equipment, machinery, transportation, and office furniture. Depreciation helps companies distribute the cost of these assets over their useful life instead of charging the full cost in the purchase year. Land is not subject to depreciation because it does not lose value over time. Intangible assets such as patents are subject to a different type of accounting allocation rather than depreciation, and inventory is not subject to depreciation because it is a current asset, not fixed.

What is the Depreciation Rate for Assets?

Depreciation rates vary according to asset type and expected useful life. Generally, rates range from 5% for buildings to 33% for fast-obsoleting assets such as computers. The purpose of depreciation is to distribute the asset cost over its useful years instead of charging the full cost in the purchase year.

Simple Example: If a company buys a car worth 100,000 SAR with 25% annual depreciation rate, then annual depreciation = 100,000 × 25% = 25,000 SAR. This means the car's value will decrease by 25,000 SAR each year, and its value will become zero after 4 years.

Importance of Assets

Assets play a central role in the success and continuity of any business entity, representing the foundation companies rely on to execute operations and achieve financial goals. The importance of assets lies in several basic aspects:

• Revenue Generation: Fixed assets such as equipment and machinery are used to produce goods and provide services that generate revenue for the company
• Building Financial Value: Assets represent real value for the company and show financial strength in the balance sheet, enhancing investor and lender confidence
• Loan Collateral: Fixed assets can be used as collateral to obtain financing needed for business expansion or development
• Improving Operational Efficiency: Modern and advanced assets help increase productivity, reduce costs, and improve product quality
• Supporting Decision Making: Knowing asset value and condition helps management make informed investment decisions about renewal or replacement
• Financial Stability: Asset diversification provides financial stability for the company and reduces financial risks in case of market fluctuations

How are Assets Calculated?

Assets are calculated in financial statements based on historical cost plus all necessary expenses to make the asset ready for use, then accumulated depreciation is deducted to reach the current book value. The process includes several basic steps:

• Original Cost: Includes purchase price plus all direct expenses such as customs duties, transportation, installation, and setup
• Accumulated Depreciation: Total depreciation calculated from purchase date to current date based on the specified annual rate
• Book Value: Calculated by subtracting accumulated depreciation from original cost (Book Value = Original Cost - Accumulated Depreciation)
• Revaluation: In some cases, companies may need to revalue assets based on current market value, especially for real estate

Practical Example: If a company buys a machine worth 200,000 SAR and pays 10,000 SAR for transport and installation, then original cost = 210,000 SAR. If depreciation rate is 20% annually and two years have passed, then accumulated depreciation = 210,000 × 20% × 2 = 84,000 SAR, and current book value = 210,000 - 84,000 = 126,000 SAR.

Frequently Asked Questions

1. What is the difference between current assets and fixed assets?

Current assets can be converted to cash within one year such as inventory and accounts receivable, while fixed assets are used for more than a year such as buildings and equipment.

2. Why is land not subject to depreciation?

Because land does not lose its value over time but may increase, and is not subject to wear or obsolescence like other fixed assets.

3. How do I know the appropriate depreciation rate for my assets?

You can refer to the approved tax guide from the Zakat, Tax and Customs Authority, or consult a specialized accountant to determine the appropriate rate according to asset type.

4. Can the depreciation calculation method be changed?

Yes, but the change must be justified and comply with accounting standards, and the change must be disclosed in the financial statements.

5. What happens when selling an asset before the end of its useful life?

Profit or loss from the sale is calculated by comparing the sale price with the book value (original cost minus accumulated depreciation) at the sale date.

6. How do assets affect financial statements?

Assets appear on the assets side of the balance sheet, and depreciation affects the income statement as an expense, reducing net profits and tax liability.

Conclusion

Assets are considered among the most important financial elements in any business entity, representing the foundation on which operational activities are based and financial goals are achieved. Understanding different types of assets - from current assets quickly convertible to cash, to long-term fixed assets, and intangible assets with economic value - helps business owners make informed financial decisions.

Proper asset management requires deep understanding of how to calculate their value and apply appropriate depreciation, ensuring financial statement accuracy and achieving legitimate tax benefits. Additionally, knowing the importance of each type of asset and how they affect the company's financial performance enables management to improve operational efficiency and increase profitability.

Ultimately, smart investment in appropriate assets and efficient management contributes to building a strong financial foundation for the entity, enhances its ability to grow and expand in the future, achieving sustainable success in the competitive business environment.