Active Asset Definition

0
26

What Is an Active Asset?

An active asset is an asset that is used by a business in its daily or routine business operations. Active assets can be tangible–such as buildings or equipment–or intangible–such as patents or copyrights. They are reported in the asset section on a business’s balance sheet. Active assets are also sometimes called core assets.

Key Takeaways

  • Active assets are used by a business in its daily or routine business operations for the purpose of revenue production.
  • Active assets become inactive assets when they lose their ability to generate revenue.
  • In contrast, passive assets are not central to the daily operations of a business but can still produce income.
  • Active assets are standard elements in enterprise risk management (ERM) methodologies.
  • The level and nature of an active asset’s performance will vary based on its specific business environment.

How Active Assets Work

Businesses depend on active assets in order to function on a daily basis. When analysts and business managers are monitoring a business’s operations in order to spot potential disruptions, they typically pay close attention to the active assets of a company. If certain assets, especially those which are vital to standard day-to-day business operations–are fluctuating, it could signal an impending deterioration in financial or operational performance. Today, active assets are standard elements in enterprise risk management (ERM) methodologies.

The level and nature of an active asset’s performance will vary between industries and even between specific businesses that employ different operating procedures within the same industry. For example, two businesses selling similar merchandise online may use vastly different inventory sourcing practices in an effort to get an edge on working capital management.

One business may run an aggressive inventory policy, such as the just-in-time (JIT) inventory system where raw-material orders from suppliers are aligned directly with production schedules. Meanwhile, the other business may choose a more conservative inventory policy by keeping plenty of product on hand. There is no right or wrong method; maintaining active asset levels is just one piece of a company’s larger management strategy.

Active Assets vs. Passive Assets vs. Inactive Assets

Active assets stand in contrast to passive assets, which may not be required by a business at a given time in order to operate. Passive assets that are not central to the daily operations of a business can still produce income, such as Treasury securities. However, these assets are not considered active because they are not required to maintain normal business operations. Active assets should also not be confused with active asset allocation, which is a type of investment strategy.

Active assets can also be contrasted with inactive assets, which have either reached the end of their useful life, are in need of repair, or are otherwise not being utilized in a productive manner by the business. Categorically, the essential point of differentiation for an asset is its revenue-generating capabilities. Those assets that are required to maintain standard operations while simultaneously adding to revenue production are classified as active assets. Once an asset loses that ability, it is considered an inactive asset.



Original Source