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.
For many typical businesses these assets would include business premises, machinery, motor vehicles, office equipment and long-term investment positions.
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.
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.
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:
|March 20||Plant Machinery||$850,000|
This journal entry would look like table 2 below if we were to update our accounting equation for the non-current asset purchase: