Whether you’re scaling your business or just starting up, equipment and machinery is no doubt something you need if you plan to grow. But when it comes to the accounting cycle, where does it slot in? Is equipment an asset? Yes, but is it a current asset? Read on to find out.
Is equipment an asset or liability?
Equipment is an unusual case as it can be considered both an asset (in that it helps your company grow and will incur greater sales) and a liability (as you may still be in the process of paying it off). Bearing that in mind, it is important to understand that it isn’t quite either.
Equipment is an asset, but not a current asset. Instead, it’s considered a non-current asset.
What is a fixed asset?
A fixed asset is another way of referring to a non-current asset. They may also be described as long-term assets. Fixed assets can be tangible or intangible, with tangible fixed assets referred to property, plant and equipment (PP&E).
Equipment is a fixed asset, or a non-current asset. This means it’s not going to be sold within the next accounting year and cannot be liquidized easily. While it’s good to have current assets that give your business ready access to cash, acquiring long-term assets can also be a good thing. For investors, this suggests a company is well equipped for long-term growth and scaling up operations as new equipment increases your efficiencies.
Is equipment a long term or current asset?
As mentioned, equipment is not a current asset, but it is considered a benefit to the company. Therefore, it is considered a long-term asset. This means it can depreciate over time, unlike current assets. There is an advantage to these high-cost, longer-term assets, which is that they can be made into “capital expenditures,” meaning that the expense can be spread out over a number of years, so the large initial output doesn’t immediately eat into the profit of the year the item was purchased.
This is especially useful for small companies looking for investment, as they can purchase the equipment they need in order to grow, but don’t need to sacrifice a significant portion of their profit. For example, if Company A buys equipment for $600,000 in 2019 but has an annual profit of $700,000, accepting the whole cost in the year 2019 would leave them with a meagre final profit of $100,000. This wouldn’t be promising to an investor, but by spreading the cost out, Company A can still acquire the equipment they need while keeping a healthy profit.
However, it’s important to remember that depreciation will need to be entered on the balance sheet and is considered an expense.
What’s the difference between current assets and non-current assets?
Non-current assets are considered essential to a company’s operations. Current assets, on the other hand, can be relatively easily converted into cash. Any current asset must be something that can be easily liquidized within the accounting year. Most equipment cannot be removed from a work process with compromising operations or revenue, so you cannot swap them for cash.
Is equipment on the balance sheet?
Yes, it is, and it will need to be listed as a “non-current asset” and then added to any “current assets” you have so you can accurately list your company’s total assets. You do not need a separate equipment balance sheet to differentiate these types of assets.
What are other non-current assets?
Other long-term assets include:
Other assets like patents
Non-current assets should be items that aren’t expected to be sold.
What if I trade in equipment?
If a business buys equipment with a view to selling it (and not for use in production), then it would be considered inventory, which is a current asset.
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