While your company focuses on selling your products or services to make money, you may take for granted the hardware that streamlines this process. But equipment is more than just a fixture inside your company walls. Whether you are establishing a startup or expanding your company, equipment is a long-term asset that can provide value now and in the future.
How is equipment classified in accounting? For example, is equipment an asset or a liability? We’ll help you discern the difference and answer general questions along the way.
Equipment can be considered both a liability and an asset. For example, if you have a loan on your equipment, it is a liability.
As an asset, the equipment can help you increase sales. However, equipment is not a current asset, but a noncurrent asset. [Related: Complete Equipment Leasing Guide for Businesses]
Equipment is considered a noncurrent asset – or fixed asset. A noncurrent asset is a long-term investment that your company makes that is not likely to become cash within an accounting year or does not easily convert to cash.
Fixed assets generally apply to property, plant and equipment (PP&E). While noncurrent assets can lower cash flow, they can signal to investors that you are serious about growing your company and increasing your customers’ trust in your brand as you scale your line.
Equipment essential to your industry or business can be considered an asset. These are examples of typical equipment assets:
Since your equipment is a long-term asset that provides sustainability, it’s essential to manage it properly. Only use the equipment for tasks it was made to do. The more you think of equipment as an asset and less as a tool, the easier it will be to put in the time and money for the maintenance and upgrades it requires.
Regular audits and inspections of your equipment can maximize its efficiency and life expectancy. By accurately managing your long-term assets, you can prevent extended shutdowns that impact your profits. Plus, you can protect the value if you decide to upgrade or sell later.
Your business can have both current and noncurrent assets. How quickly you plan to use the resource will determine if it is recorded onto the balance sheet as a current asset or a noncurrent asset.
Current assets are set to be liquidated within the year. As a result, your company will utilize existing assets to pay bills and fund day-to-day expenses. Here are some current assets:
Here is the formula for calculating current assets:
Accounts receivable + Cash + Cash equivalents + Inventory + Liquid assets + Marketable securities + Prepaid expenses = Current assets
A noncurrent asset will not have value until at least a fiscal year has passed. As a result, companies invest in noncurrent assets over several years to avoid huge losses during seasons of growth. Here are some standard noncurrent assets:
Current and noncurrent assets have their own columns on an accounting spreadsheet. First, however, they are totaled together and reconciled against liabilities and equities.
Equipment will be listed on your balance sheet as noncurrent assets. Therefore, it is unnecessary to have a separate balance sheet just for your equipment.
Your company may gain assets by borrowing money from financial institutions and investors, following this formula:
Assets = Liabilities + Shareholders’ equity
The balance sheet is imperative to understanding your company’s current financial condition and engaging investors to accelerate the business’s growth. Creating an accurate balance sheet on your own can be overwhelming, though. If you cannot hire an in-house or contract accountant, you should investigate the best accounting software for your business. You can read about some of our top picks in our QuickBooks Online review, FreshBooks review, Oracle NetSuite review and Zoho Books review.
Your company’s balance sheet has three parts – assets (what your business owns), liabilities (what your company owes) and ownership equity (investment amounts by shareholders).
There are three main categories of noncurrent assets: tangible, intangible and natural resources.
Tangible assets are company-owned property or physical goods that are integral to the business operation. This asset is valued at its original cost minus any depreciation. However, tangible assets – such as land – may be void of depreciation because they tend to appreciate.
Intangible assets are not physical in form but offer significant company value. These assets are classified as definite (like trademarks) or indefinite (such as brand recognition).
Natural resources are also known as “wasting assets” because of their loss during consumption. These resources from the earth include fossil fuels, minerals, oil and timber.
Here is the natural resources balance sheet formula:
Cost of acquisition + Exploration + Development costs – Accumulated depletion = Natural resources assets
Whether your business uses the aforementioned current or noncurrent assets, make sure your accounting personnel record them properly on the balance sheet.