Financial Accounting &

Analysis

Accounting for taxation, employee benefits,

non-current assets.
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(Accounting for non-current assets)

This topic will teach you about the accounting for non-current assets

Learning Objectives

At the end of this topic, you will be able to:

Develop an understanding of assets
Understand what are non-current assets
Identify the 3 types of non-current assets
Identify the examples of non-current assets
Understand the cost of asset
Develop an understanding of depreciation and its recording
Understand the types of depreciation
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Asset
Assets

Non Current
Asset/ Fixed Current Asset
Asset

Tangible Intangible Cash,

Asset/ PPE Asset Inventory

Software
Building
Licence
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Non-current Assets
A company's assets are divided into two categories: non-current and current assets, which appear on a
company's balance sheet.

Non-current assets, which are also referred to as long-term assets, are capitalized and not expensed. Which
means that the company allocates the cost of the asset over the number of years for which the asset will be in
use, instead of expensing the entire cost to the accounting year in which the asset was purchased.

Depending on the type of asset, it may be depreciated, amortized, or depleted.

Non-current assets are a company's long-term investments for which the full value will not be realized within the
accounting year. They are typically highly illiquid, meaning these assets cannot easily be converted into cash.

Examples of non-current assets include investments, intellectual property, real estate, and equipment. non-
current assets appear on a company's balance sheet.
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Non-current Assets

The assets section of the balance sheet is segmented according to the type of asset. The leading section is
"current assets," which are short-term assets that can be converted into cash within one year or one operating
cycle. Current assets include items such as cash, accounts receivable, and inventory. non-current assets are
always classified on the balance sheet under one of the following headings

• Investments
• Property, plant, and equipment
• Intangible assets
• Other assets

Property, plant, and equipment—which may also be called fixed assets—encompass land, buildings, and
machinery (including vehicles)
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Non-current Assets
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Non-current Assets
Non-current assets fall under three major categories: tangible assets, intangible assets, and natural resources.

Non-current assets, whether tangible, non-tangible, or natural resources, will benefit the company for more than
one year. They differ from current assets, which can be conveniently sold, used, or exhausted through standard
business operations within a year, such as inventory and accounts receivable

1. Tangible Assets: Tangible assets are typically physical assets or property owned by a company, such as real
estate and equipment. They are the main type of assets that companies use to produce their products and
services

2. Intangible Assets: Intangible assets are goods that have no physical presence. Although they may be created,
such as a patent, intangible assets can also arise from the sale or purchase of business units e.g, goodwill.
The assets created by the business lack a recorded book value and are, therefore, not recorded on the
balance sheet.
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Non-current Assets
Intangible assets can be definite or indefinite. An example of an indefinite intangible asset is brand
recognition, which remains for as long as the company stays afloat. On the other hand, a definite intangible
asset comes with a limited life, and it only stays with the company for the duration of a contract or
agreement.

An example of a definite intangible asset is a legal agreement to operate the patents of another entity. The
company is required to operate the patent for an agreed period of time, and the creator of the patent
remains the owner of the patent. Even though an intangible asset lacks physical value, it can significantly
contribute to the long-term success of a company.

3. Natural Resources: Natural resources are assets that come from the earth. Examples of natural resources
include fossil fuels and timber. Natural resources are also called wasting assets because they are used up
when they are consumed. The assets must be consumed through extraction from the natural setting.
For example, natural gas is an example of a natural resource that must be extracted in order to be used. It
means that the asset must be mined or pumped out of the ground for it to be used. Natural assets are
recorded on the balance sheet at the cost of acquisition plus exploration and development costs and less
accumulated depletion.
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Examples of Non-current Assets
Examples of non-current assets include fixed assets like property and equipment. Long-term investments such as
bonds or real estate, or investments made in other companies are also common non-current assets. Trademarks,
client lists, and the goodwill acquired in a merger or acquisition, are all considered intangible long-term assets

It is quite common for capital-intensive industries to have a large portion of their asset base composed of non-
current assets. An example of such a company is an oil refinery. Conversely, service businesses may require
minimal to no use of fixed assets. While a high proportion of non-current assets to current assets may indicate
poor liquidity, this may also simply be a function of the respective company’s industry.

Other non-current assets include the cash surrender value of life insurance. A bond sinking fund established for
the future repayment of debt is classified as a non-current asset. Some deferred income taxes, and unamortized
bond issue costs are non-current assets as well.

Prepaid assets may be classified as non-current assets if the future benefit is not to be received within one year.
For example, if rent is prepaid for the next 24 months, 12 months is considered a current asset as the benefit will
be used within the year. The other 12 months are considered non-current as the benefit will not be received
until the following year.
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Cost of Asset
Cost of an asset is determined according to Historical Cost Concept.

Asset will be recorded at cost price and not at market price

Cost means all expenditures necessary to acquire the asset and make it ready for its intended use.

The cost may include:

o Purchase price of the fixed asset

o Transportation cost to get the fixed asset

o Insurance on the purchase

o Taxes on the purchase

o Installation costs
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Depreciation
Definition - is a process of allocation of the depreciable amount of an asset over its estimated useful life.
Depreciation represents how much of an asset's value has been used up. Depreciating assets helps companies
earn revenue from an asset while expensing a portion of its cost each year the asset is in use. If not taken into
account, it can greatly affect profits.

Factor effecting useful life of an asset

• Physical - due to the wear and tear and exposure to the weather condition

• Technology - the technology advancement makes the asset out of date (obsoletes)

• Economy - the usage of the asset is no longer cost effective

• Legislation - the useful life is limited to the year of lease.

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Recording Depreciation
When an asset is purchased, it is recorded as a debit to increase an asset account, which then appears on the
balance sheet, and a credit to reduce cash or increase accounts payable, which also appears on the balance
sheet.

Neither side of this journal entry affects the income statement, where revenues and expenses are reported. In
order to move the cost of the asset from the balance sheet to the income statement, depreciation is taken on a
regular basis.

At the end of an accounting period, an accountant will book depreciation for all capitalized assets that are not
fully depreciated.

The journal entry for this depreciation consists of a debit to depreciation expense, which flows through to the
income statement, and a credit to accumulated depreciation, which is reported on the balance sheet.
Accumulated depreciation is a contra asset account, meaning its natural balance is a credit that reduces the net
asset value (NAV). Accumulated depreciation on any given asset is its cumulative depreciation up to a single
point in its life.
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Recording Depreciation
Carrying value is the net of the asset account and accumulated depreciation. The salvage value is the carrying
value that remains on the balance sheet after all depreciation has been taken until the asset is sold or otherwise
disposed of. It is based on what a company expects to receive in exchange for the asset at the end of its useful
life. As such, an asset’s estimated salvage value is an important component in the calculation of depreciation.

Types of Depreciation

Straight-Line
Depreciating assets using the straight-line method is typically the most basic way to record depreciation. It
reports equal depreciation expense each year throughout the entire useful life until the entire asset is
depreciated to its salvage value.

Assume, that a company buys a machine at a cost of Rs. 5,000. The company decides on a salvage value of
Rs. 1,000 and a useful life of five years. Based on these assumptions, the depreciable amount is Rs. 4,000
(Rs . 5,000 cost – Rs. 1,000 salvage value) and the annual depreciation using the straight-line method is:
Rs. 4,000 depreciable amount / 5 years, or Rs. 800 per year. As a result, the depreciation rate is 20%
(Rs. 800/ Rs. 4,000). The depreciation rate is used in both the declining balance and double-declining balance
calculations.
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Recording Depreciation
Declining Balance or Diminishing Balance Method

The declining balance method is an accelerated depreciation method. This method depreciates the machine at
its straight-line depreciation percentage times its remaining depreciable amount each year. Because an asset's
carrying value is higher in earlier years, the same percentage causes a larger depreciation expense amount in
earlier years, declining each year.

Using the straight-line example above, the machine costs Rs. 5,000, has a salvage value of Rs. 1,000, a 5-year life,
and is depreciated at 20% each year, so the expense is Rs. 800 in the first year (Rs. 4,000 depreciable amount *
20%), Rs. 640 in the second year ((Rs. 4,000 - Rs. 800) * 20%), and so on.
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Summary
In this topic, you learnt:
Developed an understanding of assets-current and non-current
Understood what are non-current assets-these are long term assets, benefit will
accrue over a long time, they are capitalized, classification on balance sheet
Identified the 3 types of non-current assets-tangible which are physical assets,
intangible are goods having no physical presence and natural resources are assets
coming from earth
Identified the examples of non-current assets-property and equipment, trademarks,
etc
Understood the cost of asset- calculated by adding all costs incurred to make asset
ready for use
Developed an understanding of depreciation and its recording- allocating the amount
of asset over its useful life, debiting expense, crediting asset
Understood the types of depreciation – straight line and declining balance