Economic and Accounting Assets

Topics: Asset, Economics, Price, Costs / Pages: 2 (485 words) / Published: May 28th, 2013

Assets are the resources of a business organization that were acquired in a market transaction and that will provide future economic benefits to the organization. It is important to understand the distinction between assets that are recorded and those that are not. The definition of assets above reflects two criteria: they (1) were acquired in a market transaction, and (2) will provide future economic benefits to the corporation. Accountants typically rely heavily on a clearly defined market transaction as the basis for recording assets. The market price reflected in a transaction between two independent parties provides objective evidence of the cost of assets acquired or the market value of assets sold. It is useful for accountants to rely on objective evidence of economic value other than a long-ago actual market transaction. In the past, accountants have chosen to rely on actual market transactions. This reliance tended to bring about uniformity in how assets are recorded, but resulted in less useful information in those situations where a purchase cost may bear little relation to the economic value of the asset acquired. For example, the costs of drilling an oil well are not related to the value of the well as measured by the amount of oil in it. Recording the costs of drilling the well is less useful than recording the economic value of the oil. Similarly, the cost of Manhattan may have been $24, but its current economic value far exceeds $24.

Requiring actual market transactions also results in some assets not being recorded. Items such as copyrights and trademarks are usually recorded as assets only if they have been purchased by a corporation for a specific price. When such items have been created or invented by the corporation, they were historically not recorded as assets, regardless of their economic value to the corporation. Similarly, high-quality employees of a corporation may have a large economic value, but

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