What is Long-Term Asset?
Whether they are non-tangible or tangible, long-term assets are those that will help the business for longer than a year. Long-term assets, often referred to as non-current assets, can cover a variety of assets such as software, long-term investments, patents, copyright, franchises, goodwill, trademarks, and trade names, in addition to fixed assets like a company's property, plant, and equipment.
The present value of long-term assets is not generally reflected in their balance sheet reporting, as they are typically documented at the time of acquisition. One way to compare long-term assets with current assets is that the former can be easily sold, consumed, utilized, or depleted in a year through regular company activities.
KEY KNOWLEDGE
Understanding Long-Term Asset:
Long-term assets are those that are kept for a long time on the balance sheet of a business. Intangible assets, like a company's patent or brand, and tangible assets, which are physical, can both be considered long-term assets.
An asset is generally regarded to be a long-term asset if its useful life exceeds a year, while there is no established accounting procedure for determining this.
Types of Asset Classification:
Classifying assets based on how easy it is to convert them into cash.
Classifying assets based on their physical existence (in other words, tangible vs. intangible assets).
Classifying assets based on their business operation usage/purpose.
Classification of Assets: Convertability
1. Currrent Assets:
Easily convertible assets into cash and cash equivalents are known as current assets; this usually happens within a year. Liquid assets are another name for current assets, and some instances of them include:
Fixed Assets or Non-Current Assets:
Assets that are not easily and quickly convertible into cash or cash equivalents are known as non-current assets. Fixed assets, long-term assets, or hard assets are other names for non-current assets. Non-current or fixed assets include, for example:
Classification of Assets: Physical Existence
1. Tangible Asset:
Assets that are tangible have a physical reality that we can see, touch, and feel. Tangible asset examples include:
2. Intangible Asset:
Intangible assets are assets that lack physical existence. Examples of intangible assets include:
Classification of Assets: Usage
1. Operating Asset:
Assets needed for a business's regular operations are known as operating assets. Stated differently, a company's operating assets are what bring in money from its main operations. Among the operational asset examples are:
Non-operating Asset:
Assets that can still provide income but are not necessary for day-to-day business operations are known as non-operating assets. Non-operating assets include, for example:
Depreciation of Long-Term Asset:
A component of long-term operational assets used in the current year can be expensed by businesses according to the accounting standard known as depreciation. In addition to raising net income, this non-cash item aids in keeping costs and revenues equal for the time in which they are incurred.
There are two important Depreciation Methods as follows:
Straight-Line Method:
The straight-line technique of depreciation is arguably the most widely used and well-liked approach. Applauded for its simplicity, it functions by depreciating the asset's value by the same amount year for the duration of its use.
Calculated as follows:
Depreciation expense = (cost – salvage value) / useful life.
2. Units of production Depreciation Method:
Using the total number of hours an asset is utilized (or the total number of units it generates) throughout the length of its useful life, the units of production depreciation technique seeks to lower the asset's value.
Depreciation expense = (number of units produced. life in number of units) x (cost – salvage value).
Declining Balance Depreciation Method:
In contrast to the straight-line approach, the falling balance depreciation technique equally spreads asset depreciation throughout the course of the asset's life. Based on the presumption that assets are more productive in their early years as compared to later in life, it has greater costs in these years.
Periodic depreciation expense = (beginning book value x rate of depreciation) x (cost – salvage value)
Frequently Asked Questions
Common categories of long-term assets are investments, property, plant and equipment, intangible assets, and other assets. Companies make long-term investments for at least two reasons, to earn income or to exercise influence on the companies in which they invest
The five most common asset classes are equities, fixed-income securities, cash, marketable commodities and real estate
Assets can be grouped into two major classes: tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets. Current assets include cash, inventory, accounts receivable, while fixed assets include land, buildings and equipment.
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