Is Equipment a Current Asset?
As a small business owner, you need to keep careful track of your accounting. Knowing how much money your business has and how that compares to the amount you owe can help you position your business for growth.
However, understanding small business accounting goes beyond simply tracking how much money you spend and how much your customers or clients pay you. You also want to make sure that you record important categories, such as your assets. The equipment that you use for your business counts as an asset. You might use different types of equipment to run your business, such as machines that allow you to produce a specific product or computers that help you develop websites.
We'll walk you through understanding current assets and how these impact your business accounting. Understanding how to track assets and what they consist of can help improve your record-keeping and keep your business financially healthy.
Is Equipment a Current Asset?
No, your equipment is not a current asset. Instead, your equipment is classified as a noncurrent asset. You'll use the equipment you purchase for your business for an extended period of time, which means that it appears in the "fixed assets" part of the balance sheet. The items in this portion of the balance sheet are sometimes referred to as "property, plant, and equipment" (PP&E). This category signifies that you'll use your equipment to help your business run for more than just a few months.
To help you better understand this classification of equipment, the following section will explain the differences between current assets and noncurrent assets. As you understand how these categories work, it'll be easier to know where different assets, such as your equipment, belong in your accounting books.
Current Asset vs. Noncurrent Asset
The difference between current assets and noncurrent assets comes down to the length of time that the asset will work for the business. A noncurrent asset is considered a fixed asset or a long-term asset because the business is expected to use it for at least a year.
For example, consider some of the tools and equipment that an electrician must buy to run their business. They will have a range of equipment, from devices to check for hot wires to wire cutters. However, these same tools can be used by the electrician on potentially hundreds of jobs over the course of several years before they need to be replaced. This means that these assets receive the "fixed" or "noncurrent" classification.
However, note that this classification relates to how the piece of equipment is used by the business. If the business regularly sells equipment, such as an electrician supply shop that sells the important equipment to the electrician, those same tools are now classified as "inventory." The business in this situation doesn't want to hold on to and use the tool for months or years on end.
What Is Considered a Current Asset?
Current assets are things that the business owns that can be converted to cash within a year. In other words, something that can be sold, consumed, or in some other way used by the business within the next year will be counted in this category. Current assets can also be referred to as current accounts.
As a small business, you might have different types of assets that you note for this particular classification. These include:
- Cash and cash equivalents the business has on hand and in business accounts
- Foreign currency obtained through international sales
- Short-term investments that can be liquidated quickly
- Prepaid expenses, such as prepaid insurance
- Accounts receivable
- Inventory or raw materials that the business has in stock to sell
- Any other liquid asset
- Long-term investments, such as investments in other countries or even in land and real estate
- Buildings used for the business
- Equipment employed in the running of the business, such as office equipment
- Vehicles used by the business
- Intangible assets that don't have a physical presence (A good example might be patents and related intellectual property)
Knowing how to track your current assets can help you better understand your cash flow and the value of your business compared to current liabilities. Investors and creditors often track the current assets of businesses to better understand the performance of a company.
What Is Considered a Noncurrent Asset?
Noncurrent assets are tools, equipment, and related assets that will provide value and use for a business for an extended period of time. These items cannot be easily transformed into cash within a year or the business's operating cycle. Instead, the business plans to use them for years to come. This means that when businesses account for the cost of items in this category, they will allocate funds toward the asset for the duration of that asset's use.
These important assets also play an essential role in business operations. Some common areas that businesses can find noncurrent assets to track on their balance sheet include the following:
How Do You Record Equipment on a Balance Sheet?
Recording tangible assets like equipment purchases on the company's balance sheet can be a bit more complicated than other types of purchases. Unlike buying materials to produce a product, for example, purchasing equipment needs to account for the depreciation of the equipment. In other words, as you use your equipment, it loses value. For example, as you drive a vehicle, it loses value with each passing year until you either sell it or otherwise get rid of it. How you record your equipment purchases needs to reflect this reality.
The first step is to debit the asset account. This means debiting the value of the equipment in the relevant fixed asset account (e.g., office supplies). Then, you will credit the account that you used to pay for the equipment (e.g., your cash account or accounts payable).
How to Record Equipment Depreciation
Since this particular asset will lose value over time, you need to account for these changes in your accounting books. Note that you record your depreciation even if the market value of the item increases. The most common method of calculating your deprecation is the Modified Accelerated Cost Recovery System (MACRS).
To find your rate of depreciation, first consider the value of the equipment when you purchased it. Next, estimate how much the equipment will be as scrap. The difference between these two numbers is your total expected depreciation. However, you don't lose all of this asset's value in a single year. Instead, it happens over the course of the lifetime of the equipment.
Therefore, the next step is to determine the likely life of the asset. Do you expect it to last for six, 10, or 20 years, for example? Take your expected depreciation and divide it by the total lifetime of the asset.
Let's say you buy a new industrial printer machine for $10,000. You expect that the printer will last 10 years. You also expect that when you get rid of it as scrap, you might get $1,000 for the metal. Therefore, the total expected depreciation for this machine is $9,000, which will be lost over a period of 10 years. Dividing $9,000 by 10 years tells you to subtract $900 in depreciation each year, which you will record in your accumulated depreciation account.
As you calculate the value of your assets, your book value is the value of an asset as it's currently listed on the balance sheet.
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Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant to ensure you're meeting accounting standards.