A business’s balance sheet has three main components: assets, equity, and liabilities. Assets are further divided into current and non-current.
This may seem like an arbitrary delineation, but there are important implications here that impact how the asset is recognized, its liquidity, and its useful life.
Continue reading through this guide as we explain what non-current assets are, provide common examples, and discuss how to properly account for them.
What are non-current assets?
Non-current assets are things of value that the business possesses or uses for more than one year. For this reason, they may also be referred to as long-term assets.
These are assets that the business will use to generate sales or support operations. They are reported on the balance sheet and contribute to the company’s total asset value.
As we’ll cover in further detail below, common types of non-current assets include property and equipment, intangible assets like intellectual property, and natural resources.
Overall, non-current assets play an important role in a business’s long-term financial planning. Of note, the cost of a non-current asset is capitalized over its useful life rather than being expensed in the year that it’s purchased, unlike current assets.
Types of non-current assets
To get a better understanding of what’s considered a non-current asset, here are the main categories:
- Tangible Assets: These are physical assets that the company owns, including real estate, land, equipment, or machinery.
- Intangible Assets: This includes assets that have economic value, but cannot be possessed physically.
- Natural Resources: These are assets that occur naturally on Earth. The business does not create them, though they can extract and use them to support operations or generate income.
Examples of non-current assets
Within each of the three main categories of non-current assets, there are some common types of assets that a business may possess, including:
- Tangible non-current assets: Land, buildings, machinery, vehicles, and equipment.
- Intangible non-current assets: Patents, trademarks, copyrights, intellectual property, and goodwill (the premium paid over an acquired company's identifiable assets).
- Natural resources: Timber, natural gas, and fossil fuels.
These common non-current assets reported may vary between industries. For instance, a company in the pharmaceutical industry may have specific patents for new drugs or specialized research equipment. Likewise, a retailer’s non-current intangible assets may include brand names, while agricultural operations will have specialized farm equipment and land.
Difference between current and non-current assets
Current and non-current assets are both reported on the company’s balance sheet. The main difference between the two is how long the business plans to hold and use the resource.
More specifically, non-current assets are expected to be held for longer than one year, as mentioned throughout. In contrast, current or short-term assets will be used up within one year.
Another clear distinction between the two asset types is their liquidity, meaning how quickly they can be converted into cash.
In other words, current assets such as cash, inventory, and accounts receivable are highly liquid. Even non-cash items can be quickly converted into cash that the business can use. This compares to common non-current assets, such as trademarks, equipment, or real estate, which aren’t as liquid or easy to convert into cash.
How to account for non-current assets?
When a company acquires a non-current asset, how do they report this in their financial records? Let’s walk through some important concepts about accounting for long-term assets.
Capitalization vs. expensing of non-current assets
Long-term assets are capitalized, not expensed during the period that they are acquired. Otherwise, it could create artificially high expenses in period when the asset was purchased or created.
Since the useful life of non-current assets is expected to last more than one year, their cost needs to be spread out and recognized in the same period that they are used to generate revenue.
This means that its value is initially recorded as a non-current asset on the balance sheet. Then, depreciation or amortization expense is recorded each period, which decreases the asset’s value on the income statement to reflect usage and wear and tear.
Depreciation and amortization methods for non-current assets
Tangible assets like machinery or property are capitalized using depreciation. Intangible assets are capitalized using amortization. There are a few different methods to calculate each of these expenses, such as:
- Straight-line method: Depreciation or amortization expense is spread evenly over the asset’s useful life.
- Double-declining balance: Uses a depreciation/amortization rate that is double that of the straight-line method.
- Units of production method: Bases the depreciation expense for the period on the actual usage of the asset.
Each method has pros and cons, and companies have their choice of which one they choose to use. However, once selecting a method, they must stick with it and cannot later switch to another.
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Frequently asked questions
How are non-current assets valued on a balance sheet?
Non-current assets are valued on the balance sheet at their book value, or carrying cost. Book value is calculated by subtracting the accumulated depreciation amount from the historical cost. In other words, if a piece of machinery was purchased for $35,000, and the accumulated depreciation for the asset is $12,000, the book value that would be reported on the balance sheet is $23,000.
Why are non-current assets important for a business?
Non-current assets are important for a business because they represent the resources a company can use to support operations or convert into cash for one or more years. They contribute to the company’s financial success, and without long-term assets, a business would not have the resources to continue operations.
