What are non-current assets?

Non-current assets represent a company’s long-term investments, which are not expected to be fully realized within the accounting year. These assets include items that do not have an inherent value, such as intangible assets, or assets with no fixed expiry, like property or land. Essentially, non-current assets are resources that a business uses over a long period to generate revenue.

Rather than being expensed immediately, non-current assets are capitalized. This means that their cost is spread out over the duration of the asset’s perceived useful life. For example, if a company buys a piece of machinery, its cost is not fully accounted for in the year of purchase. Instead, the cost is distributed over the years during which the machinery is expected to be useful. This process is known as amortization for intangible assets and depreciation for tangible assets.

How do non-current assets differ from current assets?

Non-current assets differ significantly from current assets. While non-current assets are long-term investments, current assets are considered short-term investments. Current assets include:

• Accounts Receivable: This is the outstanding money owed to a business by its customers. It represents short-term claims against purchasers of goods and services.
• Inventory: These are the goods that a company has available for sale. Inventory is considered a current asset because it is expected to be sold and converted into cash within a year.
• Prepaid Expenses: These are expenses paid in advance, such as insurance, administration costs, and rent. Since these expenses cover services or goods to be received within a year, they are classified as current assets.

How are non-current assets classified?

Company balance sheets are organized to separate different types of assets for clarity and financial analysis. Typically, non-current assets are classified under the following headings:

• Long-term Investments: These include investments that are not expected to generate profit or cash flow within a 12-month period.
• Fixed Assets: These include tangible assets like property, plant, and equipment (PPE). Examples include buildings, machinery, and office furniture.
• Intangible Assets: These are non-physical assets such as patents, trademarks, and goodwill. Although they do not have a physical presence, they can be incredibly valuable to a company.

What is an example of a non-current asset?

To better understand non-current assets, let’s consider an example involving a mobile phone manufacturer. Suppose the company needs a specialized machine to produce phones and decides to purchase one for £2 million. The machine’s expected useful lifespan is ten years, and the company estimates that after this period, it will still be able to sell the machine for £200,000.

In this scenario, the depreciation expense for the machine is calculated as follows:

Depreciation Expense = (Initial Value – Salvage Value) / Useful Life

Depreciation Expense = (£2,000,000 – £200,000) / 10 = £180,000 per year

This means that each year, the company will allocate £180,000 as a depreciation expense on its income statement. At the end of the machine’s useful life, the company will account for it using the salvage value of £200,000.

Why are non-current assets important?

Non-current assets are crucial for several reasons:

• Long-term Revenue Generation: Non-current assets are used over a long period to generate revenue. For example, a manufacturing machine continues to produce goods for many years, contributing to the company’s income.
• Financial Stability: Having substantial non-current assets can indicate financial stability and long-term investment in the company’s growth. This can be attractive to investors and lenders.
• Depreciation and Amortization: The process of spreading the cost of non-current assets over their useful life helps in accurate financial reporting and tax planning. Depreciation and amortization reduce taxable income, thereby providing tax benefits.

In summary, non-current assets are a vital component of a company’s financial ecosystem. They represent long-term investments that support sustained business operations and growth. Understanding the classification, management, and importance of non-current assets can provide valuable insights into a company’s financial health and strategic planning.