Non-Current Assets – How to Account for Them

Definition

Assets that a business normally purchases for use over the long-term are defined as non-current. When we say purchase of course we are more referring to point that the firm has control over the economic benefits of this asset, rather than the actual need to buy it in the traditional sense. But more about that under our series on accounting concepts.

Examples

For many typical businesses these assets would include business premises, machinery, motor vehicles, office equipment and long-term investment positions.

An earth moving digger is an example of a non-current asset.
Photo by Anamul Rezwan from Pexels

Explanation

These are the types of assets that a firm intends to be using or holding for a period greater than the normal accounting cycle, that being one year. This treatment is to reflect the differences in how a business uses it capital. Some spending is required for the day-to-day activities, power, wages, insurance etc, while other spending is required to enable the business to deliver its core functions over the long-term.

When non-current assets are purchased by a firm it is oftened referred to as capital expenditure or investment expenditure. This is to differenciate it from operating expenditure, or revenue spending where the expenditure is focused on the shorter-term needs of the business, such as power, ages and insurance.

A pumpjack or nodding donkey oil rig is an example of a common non-current asset in the oil business.
Photo by Pixabay from Pexels

So a good example of the difference would be the spending on machinery by a firm would be considered capital expenditure, while maintenance to keep it running etc would be operating expenditure.

Accounting Entries and the Accounting Equation

Non-current assets are naturally debit accounts, so when adding to the account it is a debit entry and when taking-away or reducing the balance it is a credit entry.

In table 1 below you can see they appear on the left side of the accounting equation, denoting they are a debit account. And so they will come within the “Assets” category.

The accounting equation demonstrates the six account classes used in accounting.
Table 1

Now lets look at an example to see what the impact is on the accounting equation and the journal entries involve. On March 20th ABC Ltd buys a new digger for $850,000, cash, for its earthworks business. To bring this transaction to account in its books ABC It would make the following double-entry bookkeeping entry:

DateAccount NameDebitCredit
March 20Plant Machinery$850,000
Bank$850,000
To record the purchase for cash of new 566 digger for cash from XYZ Machinery Suppliers.

This journal entry would look like table 2 below if we were to update our accounting equation for the non-current asset purchase:

The purchase of a non-current asset for cash is recorded under the asset category in the accounting equation.
Table 2

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