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Companies can own many different kinds of assets. When talking about assets, companies think in terms of short term assets and long term assets. Long term Assets are assets which have a useful life of over twelve months. This article will cover the definition of long-term assets, types of long-term assets, how long-term assets are valued, and understanding how long-term assets are listed on company balance sheets. A major piece to a businesses balance sheet, long term assets can tell readers a lot about a business.
- Long-term assets benefit the companies that own them for periods longer than one year. These are different from short term, or current assets.
- Common types of long-term assets include investments; property plant, and equipment; and intangible assets, but there are other a variety of other types; all of which may be depreciated or amortized over a useful life.
- Long-term assets can be found on a company’s balance sheet in its own long term asset section.
What Are Long-Term Assets?
Long-term assets have a useful life of more than one year. This type of asset can benefit companies for many years. A good example might be a company vehicle, or a machine used in production; these assets are useful for many years and contribute to the operation over their life.
Long-term assets can be tangible and in-tangible.
- Tangible assets have a physical form, something you can touch such as a computer or a trailer used to haul company equipment.
- Intangible assets cannot be touched. Intangible assets can be created or acquired. An example might be intellectual property such as the process for completing a service more efficiently, or patent.
Short-Term Assets vs. Long-Term Assets
Companies can have both short-term and long-term assets.
Short-term assets are also known as current assets. This type of asset typically can be converted into cash within one year. An example of a short term asset might be inventory which is used to generate sales, or even cash on hand which is classified as a current asset.
Long-term assets, or non-current assets, are the assets with a useful life of over a year which contribute to the operation of the business. These could be the land and buildings the business owns on which it operates. Unique to long term assets, they are depreciated over their useful life on the balance sheet.
Types of Long-Term Assets
Companies can own many different kinds of long-term assets. Some of the common categories might be long term investments, patents, copyright, trademarks, or plant property and equipment. Each business has a unique balance sheet and may have other types of long term assets listed
Intangible assets are long term assets which are not physical in nature, like a building might be. These are assets like goodwill, software, trademarks and brand recognition which contribute to the operation of the business and still are held on a businesses balance sheet as having value.
Investments a company holds for more than a year are considered long-term assets. These can be stocks, bonds, or even land held for speculation with the intent of generating a return for the business. While it is possible to sell these investments within one year of purchase, businesses will indicate they are holding securities for more than a year if placing the asset in a long term category on the balance sheet.
Property, Plant, and E quipment
Property, plant, and equipment (PP&E) are tangible long-term assets. These include land, buildings, machinery and equipment, and even factories which will be depreciated over the useful life of the asset.
The Value of Long-Term Assets
- Long-term assets have value for companies. There are two types of values to consider when thinking of long term assets.
- Book value: Book value refers to the value of long-term assets when they are initially purchased. This can also be thought of as the purchase price of the asset.
- Carrying value: Carrying value, also known as the fair market value, is the book value of a long-term asset minus its accumulated depreciation. As assets are used year after year, the business will depreciation, or reduce the book value by an amount, to come to the assets carrying value.
Depreciation of Long-Term Assets
- Tangible long-term assets depreciate. Depreciation allows companies to reduce the value of a long-term asset on their balance sheet over time. Depreciation is predetermined when a business purchases an asset; the useful life of the asset is determined and the business annually will reduce the value of the asset against its useful life.
- Not that intangible assets do not depreciate but rather are amortized. While similar in the fact that it reduces the value of the asset, it is only applicable to intangible assets.
- Companies may use a few different methods of depreciation:
- Straight-line: The most simple way to depreciate an asset, the business will take the purchase price, reduce it by its salvage value, or scrap value, and divide it by the useful life of the asset to determine its annual depreciation; at the end of its useful life the assets carrying value will equal its salvage value.
- Double-declining balance: A depreciating method which accelerates depreciation in the early years of an asset's life by reducing the book value by depreciation and comparing this against the useful life of the asset.
- Units of production: depreciating based on the amount of repetitions an asset will produce. If a machine is purchased and expected to make one million units over its life, units of production depreciation will measure the amount of units produced in a year versus its lifetime yield to determine the amount of depreciation to book.
Long-Term Assets on the Balance Sheet
The balance sheet is one of a few important financial statements for a company. It measures a business's assets, its debts, and the remaining equity or ownership of the business. Long term assets are recorded in its own subsection of a business's assets, called long term assets.
A company’s balance sheet will follow the same formula across any business; assets equals liabilities plus assets. Another way to think of this is a businesses assets, or items of value, equal either the debt that purchased these assets, or the equity or owners claim to those assets.
Note that balance sheets help executives, regulators, and analysts understand the overall financial health of a company.
Long-Term Assets Examples
To think about long term assets its important to have a few examples of what an actual example for a business may look like:
- A company purchases a vehicle for $60,000. The company determines the vehicle will last five total years and a salvage value of $5,000. Each year the business strait line depreciates the asset at a rate of $11,000 a year ($60,000-$5,000)/5 years
- A business patents its technology and determines the value of the patent at $14,000. The business will amortize the patent over 20 years, or $1,400 annually.
- A business purchases a piece of equipment for $100,000 and determines it will produce 1,000,000 units. In year one the business produces 400,000 units, or 40% of its useful life. In year one the business will depreciate the asset by $40,000.
Long term assets are assets which contribute to a businesses operation which have a useful life of over a year, and are depreciated over the useful life of the asset
Long term assets are placed on the businesses balance sheet in their own section. These are initially placed at book value and later depreciated and held on the balance sheet at their carrying value.
Businesses must make assumptions about their long term assets such as salvage values and their useful life to determine carrying value, which investors should understand when interpreting a businesses balance sheet.