Financial Statement Series: Balance Sheet, Part 3, Long-Term Assets
- Rylan Kaliel
- Apr 4
- 6 min read
Updated: Apr 11
Dear readers in the previous blogs we discussed the current assets and liabilities. It is now time to think about the long-term. In this blog we will discuss what long term assets are and why are they important.
What are Long-Term Assets?
Long term assets are any assets that a company is holding for longer than a year, this can include your fleet, facility, equipment, furnishing and so on. They are referred to as property, plant, and equipment or PPE. The question still becomes why should you care about this? These assets usually are the ones that use day in and day out to generate your revenue, so they are the backbone of your business. In the next section we are going to look at the most common long-term assets and discuss the proper accounting treatment of them as well as some tips and tricks on how to keep them in great shape for future use.
Depreciation and Amortization
We need to discuss another big concept here before we get started on the examples of PPE, which is to discuss depreciation and amortization. Depreciation and amortization are important to understand. We will note later that PPE does not get expensed like, for example, office supplies, instead they get expensed through depreciation and amortization. A lot of people have issues with the concept of depreciation and amortization, and I will try to simplify it as much as possible so that we can all be on the same page.
Depreciation:
Calculates the gradual decrease in a value of a physical asset, such as fleet, building, computers and the list goes on.
Amortization:
Calculates the gradual decline in the value of intangible assets. You might ask yourself what intangible assets are. These are nonphysical assets such as any software, rights to lands and many others like that. Amortization is more complicated and will be discussed as a stand-alone concept in further blogs.
How to Calculate Depreciation and Amortization
Let’s say that you buy a truck for $20,000 for your business. The truck is going to be used till its no longer operational. You know from experience that in your line of business, trucks will run for 10 years before they are no longer useful. On the first year you would record the truck at $20,000 as an asset, not an expense. However, if you were going to sell this truck on year 5, it would be worth much less than the $20,000 you paid for it. If you keep recording the truck at $20,000 each year, then you would be overstating the value of the asset. This is where the concept of depreciation and amortization comes into play.
There are a few different ways of recording depreciation but in this blog we will focus on the most used method the straight line method. The remaining ones will be discussed in later blogs.
Straight line method:
This is the easiest method to adopt. Let’s see this method in action using the example above.
Truck’s value: $20,000
Useful life: 10 years
Depreciation per year: $20,000 / 10 = $2,000
The truck is worth $2,000 less each year that it is being used in the business.
There is one exception to this rule. On the first year of acquirement, you have to use the half-year rule. What it means that you depreciate the asset for 6 months out of that year, or only depreciate it for $1,000, no matter when you actually acquired it.
It is important to keep a separate account for the depreciation of each individual asset. Most people set up a PPE schedule to keep track of their assets and its depreciation. We will see an example of this later in the blog.
Now we are ready to look some of the most common long-term assets.
Common Long-Term Assets
Tangible assets:
These are assets that have a physical presence. In lament terms these are assets that can be touched and moved. This is a general category of assets which we will see is broken down in more detail below.
Building:
If you own the facility that you operate out of then you would want to record it as a long-term asset.
The challenge is deciding on a reasonable of time to depreciate the asset over, i.e. how long do you think the building will be operational for. Please keep in mind that depreciation is an estimate and is usually set based on the sector’s norms.
Vehicles and Equipment:
This group will encompass all of the vehicles and equipment that you utilize in your business. Please note that you want to have a separate line for each vehicle and piece of equipment in your PPE schedule but for accounting purposes all of them can be put in to one account.
Office Furniture:
This group will contain all of the furnishings you used to conduct your business. If there are no uniquely expensive furniture that you utilize in your business, then you can put there all under the same line in the PPE schedule and also of course the same line for accounting purposes.
Hardware and electronics:
This group includes all of your TVs, laptops, monitors and so on that you use in your business. The norm is to separate these into bigger groups in the PPE schedule, which means grouping all computers together, all monitors into another group and so on and so forth.
Leasehold improvements:
This group is a bit more complicated than the rest of the ones we discussed. This class represents all the improvements that you have made to a leased facility (obviously with the permission of the landlord).
This group must be depreciated differently than the rest of the PPE. The depreciation period, which we previously referred to as the useful life, is the lesser of the lease term or the improvement’s useful life.
Intangible assets:
These are the assets that don’t have a physical presence. You can physically touch or use these assets. The useful life an be tricky for these assets and is generally the years in the contract on the intangible asset for something like a software package or could be indefinite, meaning it technically goes on forever. These will be discussed more in a future blog.
Long-term investments:
This group contains any investment that you are going to hold for more than one year, such as bonds, GICs and stocks. These assets are generally not depreciated or amortized. The accounting treatment of these investments are far to complicated to discuss in this blog and will be covered in a future blog. It is best to consult an accountant when it comes to such assets.
Software:
This is any software that you have purchased or created internally for use in the business for more than a year, and that you don’t plan on selling. This can include your inventory software, accounting software, or any such items. They will be tracked in the PPE schedule under their own group and recorded for accounting purposes as one line item.
There are a number of other long-term assets however they won’t be mentioned in this blog lest it become a textbook instead and will instead most will be covered in a separate blog.
What is a PPE Schedule and How to Use it?
Most companies will utilize a PPE schedule to keep track of their long-term assets. They can be very simple or very complicated but no matter what the following items should be included.
Asset code: this is the coding system that you create to differentiate one asset from another. It can be as simple as truck 1, 2, 3 or as complicated as you feel is necessary.
Asset Description: This is a brief description of the asset. For example, 2022 750 Ford.
Cost: This is the original cost of the asset at the time of purchase. Where you purchase the asset using a currency other than Canadian dollars, be sure to record this using the exchange rate in Canadian dollars at the date of purchase.
Additions: This pertains to the assets that are grouped together such as furnishings or computer.
Disposals: This is utilized for when you have sold the asset or have decommissioned it. Usually used for the assets that you have grouped together as there would still be other items under that line, therefore you don’t want to just erase the line from your schedule.
Beginning Depreciation/Amortization: This number shows the depreciation/amortization balance at the end of the prior year. If this is your first year in business, then this number would be 0.
Monthly Depreciation/Amortization: This shows how much the depreciation/amortization per each month of the fiscal year is.
Accumulated Depreciation/Amortization: This shows the total amount of depreciation/amortization at the end of the year. It is the calculated by adding the beginning balance plus the 12 months of the depreciation/amortization for the year.
Netbook value: This number represents what the asset or the asset class is worth after subtracting the accumulated depreciation/amortization. In lament terms this is what the asset is worth.
An example of a simple PPE schedule is shown below.
Summary
I hope that you found this blog and the brief overview of long-term assets helpful.
If you need help setting up your PPE schedule, setting up the depreciation/amortization rates or how to account for them please contact KLV accounting. We are here to help you and to set you up for success.
For a free consultation, call us at 403-679-3772 or email us at info@klvaccounting.ca.
Comments