Elements of non-current assets

Definition

Non-current assets are the resources a business expects to hold and use for more than a year. Equipment, buildings, software licenses, goodwill, and many lease deposits sit in this group.

On the books, this is a section of the Balance Sheet, not a single account. It sits below current assets and above liabilities.

These items are not bought to be resold next week. They are bought to run the business for years.

The cost usually leaves the P&L slowly. Depreciation or amortization spreads it across the periods that actually use the asset.

Where it shows up

Balance Sheet: Located below current assets and above liabilities.

P&L: Related to depreciation and amortization as the assets are used.

Cash flow: Increases in this section, reported cash from investing activities decreases.

See also: Assets · Fixed Assets · Property Plant And Equipment

When you look at your Balance Sheet, non-current assets sit under the current group. Property, plant and equipment is often the largest line, shown net of accumulated depreciation.

A high total can mean a capital-heavy shop: chairs, trucks, machines, or a building. A low total can mean the business rents what it uses, or that older assets are mostly depreciated.

The profit and loss statement does not list this section. Depreciation and amortization show up as expenses while the assets stay on the Balance Sheet.

Buying a long-lived asset is an investing cash outflow. Cash falls, this section rises, and the P&L does not take the full cost that day.

How it works

A purchase lands here when it will serve the business for more than a year and it passes the capitalization threshold. The debit hits equipment, a building, or another long-lived account; the credit hits cash or a loan.

Fixed assets and property, plant and equipment are the physical members of the group. Land, buildings, machinery, vehicles, and equipment live there.

Intangible assets are the non-physical members, such as software, patents, and customer lists. Goodwill is the extra paid when you buy a whole business above the fair value of what you can identify.

A right of use asset is recorded when a lease gives you the right to use a space or a machine over the lease term. It is still a non-current asset even though you do not hold the title.

Security deposits paid to a landlord often sit here too, because you do not expect the cash back this year. If a deposit will be returned within twelve months, it belongs with current assets instead.

Each period, depreciation or amortization moves a slice of cost to the P&L. Accumulated depreciation is the contra-asset that holds all of that wear to date.

The asset leaves the books when it is sold or retired. You remove both the original cost and the accumulated depreciation, then record any cash and any gain or loss.

Keep a register of each item, its cost, and its life. A chair that is still in the operatory should be on that list; a chair that was scrapped should not.

Example

A dental office buys a patient chair and a computer for $12,000 cash. The same week it pays a $3,000 security deposit on a five-year lease.

The equipment purchase is recorded:

Debit: Equipment $12,000

Credit: Cash $12,000

Equipment goes up by $12,000, and cash goes down by $12,000. The deposit is a separate debit to security deposits and a credit to cash for $3,000.

Both items sit in non-current assets. The P&L does not show a $12,000 expense that day; depreciation will spread the chair and computer over the years they are used.

Cash from investing activities falls by the equipment purchase. The deposit is cash out as well, still not an expense until it is forfeited or applied.

Common mix-ups

Non-current assets are not the same as current assets. Inventory and receivables should turn into cash this year; a dental chair should not.

Buying equipment is not the same as recording the full expense. The cash leaves now; the expense arrives later as depreciation.

A security deposit is not rent expense. Rent is the monthly cost of occupying the space; the deposit is cash you expect back at the end of the lease.

Related terms

• Assets: Everything the business owns or controls that carries future economic value.
• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Property Plant And Equipment: The Balance Sheet grouping for land, buildings, machinery, vehicles, and equipment.
• Intangible Assets: Non-physical assets such as software, patents, and customer lists carried on the Balance Sheet.
• Goodwill: The premium paid for a business above the fair value of its identifiable net assets.
• Right Of Use Asset: The asset recorded for the right to use leased property over the lease term.
• Security Deposits: Cash held by a landlord or vendor that will be returned later.
• Accumulated Depreciation: The contra-asset account holding all depreciation taken on assets to date.