Non-current assets definition
What are non-current assets?
Non-current assets represent a company’s long-term investments, for which the full value won’t be realised during the accounting year. This can also include items that don’t have an inherent value – intangible assets, for example – or assets with no fixed expiry such as property or land.
Rather than being expensed, non-current assets are capitalised. This means that their cost is spread out over the duration of the asset’s perceived useful life rather than accounting for the cost of the asset for the year in which the company bought it. An asset would be said to have amortised or depreciated, depending on whether it is intangible or tangible.
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Non-current assets vs current assets
As opposed to non-current assets, current assets are widely considered to be a short-term investment. Current assets include accounts receivable, a company’s inventory and any prepaid expenses. Let’s look at each of these in a little more depth.
- Accounts receivable: the outstanding money that is owed to a business by its customers
- Inventory: the goods that a company has available for sale
- Prepaid expenses: any expense that the company pays in advance including insurance, administration costs and rent
How are non-current assets classified?
Company balance sheets are separated according to the type of asset being referred to. Typically, non-current assets appear under the headings of long-term investments, fixed assets – such as property, plant and equipment – or intangible assets, including patents and trademarks.
Investments are classed as non-current only if they are not expected to yield a profit or generate cash for a company within a 12-month period.
Example of a non-current asset
As an example of a non-current asset, let’s look at a mobile phone manufacturer. The company needs a machine to make phones, and so it buys one for £2 million. The machine’s expected useful lifespan is ten years, and the company believes that after this time, it will still be able to sell the machine for £200,000.
In this scenario, the depreciation expense for the machine is £180,000. This is calculated by taking the final value from the initial value, and dividing the result by the lifespan of the asset ([£2 million - £200,000] divided by 10). At the end of the machine’s useful life, it will be accounted for by the company using the salvage value of £200,000.
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