Asset

In accounting terms, an asset is an economic resource owned by a company or individual. Assets hold value because of the future benefit they can bring.

An asset may fall into two categories—tangible and intangible. Tangible assets are what you would expect. Stuff you can touch—buildings, vehicles, machines, etc. Tangible assets are further broken down into noncurrent assets (the stuff mentioned already) and current assets, which typically include inventory, cash, and securities (i.e. stocks). Obviously, the word “current” applies to how quickly the asset can be turned into cash.

Intangible assets are things that provide economic benefit but cannot be physically touched. Intangible assets include things such as goodwill, copyrights, and intellectual property. There are specific requirements about how to value intangible assets. Some are regulatory, and others stem from “generally accepted accounting principles” that are based on recommendations from the Financial Accounting Standards Board [FASB], a private, non-profit organization).

Note that the layman’s use of the term “asset” differs from the view of accountants. Not every piece of equipment shows up on the balance sheet.

The term “asset” is unusual in that it has both an accounting meaning, and a general operational meaning. In many cases, the two align. In others, though, such as accounting decisions regarding financing, there can be a mismatch.

For example, consider depreciation. It is a way of allocating out the cost of the purchase of an asset over time. But that allocation does not always match reality. Calculating it requires some choices on how to divide the depreciation over the life of the asset, an estimate on how long the asset will last, and on the salvage value. Obviously, the true cost of the asset on any given year is simply an estimate.

But because depreciation is an expense, all other things being equal, profitability can appear to change because of the way an accounting decision is applied. It presents an interesting challenge, as failing to account for the cost of the means of production would result in overspending on machinery and automation. But allocating the costs based on assumptions has its own limitations, as mentioned earlier, so including the costs can skew decision-making as well.

Fortunately, while it is good to understand how assets are accounted for, these sorts of decisions are not ones that are usually made by most frontline leaders and employees in Lean companies. The decision to purchase new buildings or multi-million dollar machines is not typically a continuous improvement activity.

But there are some smaller purchases that must be made in the course of ongoing kaizen activity. The costs that frontline teams incur from these decisions are generally much less than those of the capital assets that show up on balance sheets. But even though the equipment is less expensive and doesn’t require any accounting decisions, it still is an economic resource that provides future benefit, and the decision still requires some evaluation.

Regardless of how you plan to account for your asset, though, ask two questions before making the purchase.

1. Is this something we can make ourselves, or come up with a better idea that does not require a purchase?

This simply requires that you tap into your brain before reaching for your wallet.

2. How much time will this equipment save over what we are doing now?

When you have this estimate, you can do some rough financial calculations to see if it is a good purchase. Be conservative on the estimates, though.