It is any tangible or intangible asset used by a taxpayer for commercial purposes. It can be a commercial building in terms of tangible assets, or goodwill, which is intangible. An active asset can be used by a taxpayer or any entity affiliated with the taxpayer for business purposes.
How Active Asset Works
Active assets typically are used or form part of the day-to-day running of a business. The way an active asset behaves usually determines how well a company is thriving or not. A business manager ought to pay close attention to how their active assets are performing.
Fluctuating active assets could point to a deterioration in the performance of a business. If the trajectory is pointing upwards, then the business manager can note a healthy business environment.
Active assets should point a business owner or manager toward risk management methodologies. It is because active assets are a very reliable pointer towards business health today.
Example of Active Asset
Active assets, as mentioned already, can be tangible and intangible. They are usually listed in the asset portion of a balance sheet. Tangible active assets include the following:
- Commercial building—These could be bringing in rent as income to the business.
- Equipment—Manufacturing and production businesses own equipment that helps in the day-to-day processes of producing goods and services for sale.
- Vehicles—A company could own any number of vehicles used to transport staff and inventory that belong to the business.
- Cash—Whether cash in hand or the bank, this active asset is crucial to the daily operation of a business.
The other form of active assets is the intangible active assets. These, as their name suggests, are not in physical form but are counted as part of the business’s active assets. They are usually given value as long as the company is operational.
There are five types of the most common intangible assets. Let’s look at two examples:
- Goodwill refers to a broad spectrum of business assets that cannot exist independently of the business. Brand reputation and recognition, as well as customer loyalty, are good examples. Coca-Cola, the brand name, is an intangible asset thanks to the recognition and customer loyalty it has gathered over its years of existence.
- Intellectual property includes copyrights, trademarks, and patents owned by a business. They are legally owned and protected by a company and cannot be used by a separate entity without permission or legal consent.
Significance of Active Asset
Active assets are essential to the daily running of a business. They help to generate revenue for the company, such as rent from commercial properties. For a business to run, it is aided by the active assets that it owns. Cash is one of these tangible, active assets crucial to the daily running of a business.
Another significance of active assets is that they create value for a business over time in the form of intellectual property. Additionally, active assets such as property and equipment owned help increase a company’s net worth significantly.
Active assets are leasable to help create savings for the business. For instance, instead of buying vehicles to transport staff, the company can lease the same for a time. It helps to save on expenses such as insurance and car maintenance.