An Introduction To Non-Current Asset

Introduction

In financial accounting the assets are classified into two: one is current assets and the other is non-current assets. In this paper we will focus on the non-current assets as to what are non-current assets, their types and how they are depreciated from the accounting point of view. Now lets us start by asking a question as to what are non-current assets? Fixed assets of a company, which cannot be liquidated/sold within the first year of its reported period or the date of purchase. They are long term investments which a company uses or generates revenue over a period of time. The lock-in period for such assets is minimum 12 months. Since they are accounted for and appear on the balance sheet, this means that depending upon the type of non-current asset it can only be paid off, exhausted or depreciated so that the cost of the asset is spread over the years and not burdened at one time in the accounts of that particular year.

Types of non-current assets

In the earlier part we discussed that non-current assets are fixed long-term investments. There are various types of non-current assets and to make it easy from the accounting point of view they have been categorized into 3 major types which are (i) property, plant and equipments: These are the assets which exists physically or can say are materialistic in nature. The other term used for such assets is tangible assets. They are fixed assets such as land, structure constructed or developed on that land, vehicles, furniture etc. The site is the land and the structure maybe a shed built on it and then the equipments within that shed or factory. (ii) intangible assets: These are the assets which do not have any physical existence. They have no materialistic value however they exist, either generating revenue for the company or incurring expense such as goodwill, patents, copywrights, lease etc. (iii) Long-term investments: These are assets, as stated earlier cannot be encashed / liquidated before the lock-in period of 12 months such as bonds. To understand this better, consider X and Y to be 2 companies. Now as of 31st March 2014, X Llc Company buys 7 year bonds worth $1 million of Y Llc Company. These bonds are for 7 years period and will be converted to cash after 7 years so this is a longterm investment. However, till 1st April 2015, these bonds will be non-current asset for X Llc Company and after the 12 month lock-in period, the XLlc Company can think of leasing or mortgaging the bond.

Depreciation of non-current assets

The expenses made by the utilization of an asset are known as depreciation. The value of the asset decreases due to the wearing and tearing of the asset from its constant use. Apart from this it is also the expense incurred in maintaining or recovering the asset less the value of the asset. In accounting terms it’s the process of methodically distributing the cost of the materialistic / tangible asset through its anticipated utility life cycle. While preparing the financial statement or balance sheet, utmost care should be taken in considering suitable depreciation rate. Depreciation when done properly and methodically, it will improve the quality and accuracy enabling companies to take better future decisions and if not, then the accounts can be misleading and unreliable.

Conclusion

The aim of this paper was to discuss the non-current assets and why it is important to depreciate these values. However, different types of non-current assets were discussed and their depreciation. There are various methods of depreciation and it is a separate topic altogether. The most important thing is that if the asset is not appropriately depreciated using the appropriate rates then the financial information maybe misleading.

This article has been compiled by Evelyn, who is a writer on various academic topics.