Non-Current Assets – Accounting 101

Definition

Assets that a business normally purchases for use over the long-term. When we say purchase of course we are more referring to 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.

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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.

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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

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.

One March 20th ABC Ltd buys a new digger for $850,000, cash, for its earthworks business. 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.

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