Assets Explained for Dummies

What is an asset?

An asset is a resource of economic value, owned or controlled by an individual, business, or organisation, that can be eventually converted into cash or cash equivalents, such as money market accounts and treasury bills.

Put differently, an asset comprises three key elements: Ownership, economic value, and resource (can be utilised to create future economic benefits).

Examples of assets

Broadly, assets can be categorised into personal assets and business assets.

• Personal assets

Personal assets are assets owned by an individual or household, such as:

• Property (own dwelling, land).
• Cash and cash equivalents (physical cash, savings accounts, money market accounts, and treasury bills).
• Investments (retirement annuities, shares of companies, pension funds, provident funds, investment funds).
• Personal property like vehicles, collectibles (coins, antiques, and stamps), household furniture, and jewellery.
• Business assets
• Regarding businesses, such as companies, assets include things of value that can support production and growth. For example, raw materials, plant and machinery, inventory, and intellectual property.

Types of assets

Typically, business assets are categorised into three different types based on the asset’s convertibility, physical existence, and usage.

Convertibility: Current and fixed assets

Convertibility is an indication of how easy an asset can be converted into cash and cash equivalents.

When assets are classified according to their convertibility, they are classified as either current assets or fixed assets.

Current assets

Current assets, also referred to as liquid assets or short-term assets, are either cash or assets that can easily be turned into cash or cash equivalents, typically, within a year or less.

Examples are:

• Cash (the most liquid asset).
• Cash equivalents.
• Accounts receivable.
• Short-term deposits.
• Inventory.
• Marketable securities.

Fixed assets

Fixed assets, also called long-term assets, non-current assets, or hard assets, refer to assets that cannot be easily turned into cash or cash equivalents. Hence, fixed assets cannot be utilised to meet short-term operational expenses or investments.

Fixed assets are tangible physical assets that are essential for a business’s ongoing operations over a period exceeding one year.

Examples are:

• Buildings.
• Plant and machinery.
• Land.
• Equipment.
• Vehicles.
• Tools.
• Computer hardware.
• Office furniture.

Physical existence: Tangible and intangible assets

Asset classification based on physical existence distinguishes between two types of assets, namely tangible assets and intangible assets.

Tangible assets

Tangible assets are assets that can be touched and perceived because they exist in physical form.

Tangible assets include current assets, such as cash, and fixed assets like buildings, real estate, land, vehicles, inventory, plant and machinery, equipment, furniture, and office supplies.

Intangible assets

Intangible assets lack physical existence, hence, they cannot be seen or touched. However, they still represent value in a company. In many businesses, tangible assets are a substantial part of their asset value.

Examples are:

• Trademarks.
• Trade names.
• Brands.
• Copyrights.
• Patents.
• Goodwill.
• Franchise or lease agreements.
• Licences and permits.
• Intellectual property.
• Accounts receivable.
• Distribution networks.

Usage: Operating and non-operating assets

When assets are classified according to their usage (or purpose), they are identified as either operating assets or non-operating assets.

Operating assets

Operating assets are assets needed in the daily activities of a business. They are essential to generate income from a business’s key operations.   

Examples include:

• Cash.
• Inventory.
• Machinery.
• Equipment.
• Accounts receivable.
• Patents.
• Copyrights.

Non-operating assets

Non-operating assets are not required for the daily operations of a business but can still generate revenue.

Examples are:

• Vacant property and land.
• Short-term investments.
• Interest income from investments, such as a fixed deposit.

Assets versus liabilities

As already mentioned, an asset is a thing (item) that can be owned and that can bring future economic benefit. Conversely, a liability is something an individual or business owes, usually an amount of money.

Personal liabilities are everything an individual or household owes, such as a bank overdraft, personal loan, credit card accounts, or mortgage bond.

A person’s net worth is calculated by subtracting his or her liabilities from his or her assets.

Company liabilities comprise, inter alia, the following:

• Accounts payable (money owed to suppliers).
• Mortgages.
• Bank overdrafts.
• Bonds.
• Deferred revenues.
• Salaries and wages owed.
• Taxes owed.
• Accrued expenses.

Simply put, assets add value to a business (company), increasing the equity of a company. On the contrary, liabilities decrease the value and equity of a company.

The net assets of a company are the value of its assets minus its liabilities, calculated as follows:

(Total fixed assets + Total current assets) – (Total current liabilities + Total long-term liabilities).

Depreciation of assets

Depreciation refers to the decrease of an asset’s monetary value over time due to usage, wear and tear, and obsolescence. Although, an asset such as land is never depreciated.

Express differently, depreciation is the value of a business asset over its useful life.

When a business acquires an asset, the business is not allowed to deduct the purchase price (cost) right away. Tax regulations require that a long-term deduction must be applied, spreading the cost of the asset over its estimated useful life. Long-term deduction is referred to as depreciation, or in the words of the South African Revenue Service (SARS), ‘Wear-and-tear or depreciation allowance.’

In an interpretation note[i] about the depreciation allowance, SARS allows a taxpayer to choose between the following two methods:

• The diminishing value method

Described as follows by SARS: ‘Under this method the allowance[ii] for a year of assessment is calculated on the remaining value (also known as the income tax value), that is, the cost of the qualifying asset less an allowance for the previous years of assessment.’

• The straight-line method

Explained by SARS as a method under which ‘the allowance is claimed in equal installments over the expected useful life of the asset.’

A table[iii] is provided at the end of the interpretation note, listing the proposed write-off period (useful life) of numerous assets. For instance:

• Cellular phone (2 years).
• Electronic office equipment (3 years).
• Heavy-duty trucks (4 years).
• Passenger cars (5 years).
• Sewing machines (6 years).
• Trucks (other than heavy-duty) (4 years).
• X-ray equipment (5 years).

SARS allows that certain assets, referred to as ‘small’ items, such as loose tools, may be written off in full in the assessment year in which they are acquired and brought into use. Provided that the small item:

• is one which ‘normally functions in its own right,’
• ‘does not form part of a set’, and
• ‘is acquired at a cost of less than R7 000 per item.’

Appreciation of assets

Generally, appreciation is an increase in the value of an asset over time. It is the opposite of depreciation. Appreciation can be ascribed to several reasons, such as a result of changes in interest or inflation rates or an increased demand for or weakening supply of the particular asset.

Examples of appreciating assets are precious metals, such as gold or silver, real estate, shares, or bonds.

Company assets

In accounting, assets are items, resources, or rights acquired and owned by a company that has financial value and are expected to be beneficial to the company.

In addition, the following items are also considered assets in a company:

• Prepaid expenses that have not been depleted or have not expired yet.
• Costs comprising a future value that can be measured.

Assets are recorded on a company’s balance sheet as well as liabilities and shareholders’ (owner’s) equity, which indicate how the assets are financed. Assets, liabilities, and shareholders’ equity are part of the accounting equation which is presented in the following format:

Assets = Liabilities + Shareholders’ (owner’s) equity.

Assets are recorded under different categories on the balance sheet, such as current assets, fixed assets, and tangible assets.

Typically, the value of assets is recorded in one of two ways on the balance sheet, namely:

• The market value method

This method values an asset on the price it would sell for in the open market.

• The cost method

Assets are recorded in line with the original cost (historical cost), adjusted for any improvements and depreciation. Hence, the asset, such as a vehicle, will be recorded at its book value, which is its historical cost less the accumulated depreciation.

Accounting for intangible assets differs depending on the type of asset and are only listed on the balance sheet if they comply with the following accounting guidelines set out in the generally accepted accounting principles (GAAP):

• Intangible assets must be acquired assets, and
• assets with an identifiable value and useful lifespan that can be thus be amortised.

Assets and taxes

In South Africa, the following taxes are applicable to assets:

Transfer duty

SARS describes transfer duty as ‘a tax levied on the value of any property acquired by any person by way of transaction or in any other way.’ Transfer duty is payable by the acquirer of the property.

Transfer duty for the following two tax years according to SARS:

• 2021 (1 March 2025 – 28 February 2025)

• 2020 (1 March 2019 – 29 February 2025)

Capital Gains Tax (CGT)

South African taxpayers are subjected to capital gains tax (CGT) when their assets are disposed of in events such as sales, donations, exchanges, losses, death, and emigration.

However, SARS allows, among others, the following exclusions:

• R2 million gain or loss on the disposal of a primary residence,
• most personal assets,
• retirement benefits, and
• an annual exclusion of R40 000 granted to individuals and special trusts.

CGT rates for the last 4 tax years (2018 – 2025) are:

Refer to the article, Capital Gains Tax on Shares – From a South African Viewpoint, for a detailed explanation of CGT.

Assets in deceased estates

When a person dies, that person is called a deceased person and his or her estate becomes a deceased estate. All the assets of the deceased person are placed in the deceased estate, which must be administered either in terms of the deceased’s will, if one exists, or in terms of the Intestate Succession Act.

However, in South Africa, the following assets are not included in a deceased estate:

• Retirement funds governed by the Pension Funds Act, such as:
• Pension funds.
• Provident funds.
• Preservation funds.
• Retirement annuity funds.

Living annui

[i] Interpretation Note: No. 47 (Issue 4) – Date: 24 March 2025 – Act: Income Tax Act 58 of 1962 – Section: Section 11(e) – Subject: Wear-and-Tear or Depreciation Allowance.

[ii] Accentuations in citations, as well as other accentuations, are by the article writer.

[iii] Annexure – Schedule of write-off periods acceptable to SARS.