Assets that businesses purchase typically for use over the long-term we define as non-current. When we say purchase, we are more referring to the 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.
These assets would include business premises, machinery, motor vehicles, office equipment, and long-term investment positions for many businesses.
These are the types of assets that a firm intends to be using or holding for a period greater than the typical accounting cycle, one year. This treatment is to reflect the differences in how a business uses its capital. Some spending is always necessary, such as day-to-day activities, power, wages, insurance etc. At the same time, capital spending is essential for a firm to deliver its core functions over the long term.
When a firm purchases non-current assets, it is often referred to as capital expenditure or investment expenditure. This language differentiates it from operating expenditure or revenue spending, where the spending focuses on the shorter-term needs of the business, such as power, ages and insurance.
So a good example of the difference would be the spending on machinery by a firm would be considered a capital expenditure, while maintenance to keep it running etc., would be operating expenditure.
Journal 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.
Table one below shows that assets appear on the left side of the accounting equation, denoting debit accounts. Whereas liabilities, revenue and capital, all right of the equals sign, are credit accounts.
Now, let’s look at an example to see the impact on the accounting equation and the journal entries involved. 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:
|March 20||Plant Machinery||$850,000|
This journal entry would look like table two below if we were to update our accounting equation for the non-current asset purchase:
We trust this short tutorial on the accounting for non-current assets has helped your understanding. We haven’t touched on depreciation in this article, but please see our article here if you would like more information.