Long Term Assets - definition & overview

In the world of small businesses, the term 'Long Term Assets' holds a significant place. These assets, often referred to as non-current assets, are the backbone of a business, providing the necessary resources for its growth and expansion. They are not intended for immediate sale but are used in the production of goods or services intended for sale, rental to others, or for administrative purposes. They are expected to provide economic benefit beyond one year or one operating cycle, whichever is longer.

Understanding the concept of long-term assets is crucial for small business owners, as these assets play a vital role in the financial health and operational success of the business. They are the investments that will generate income over a long period, providing the stability and security that every business seeks. They are the tangible and intangible resources that a business uses to generate revenue, and they are often the most significant items on a company's balance sheet.

Types of Long Term Assets

Long-term assets can be broadly classified into two categories: tangible assets and intangible assets. Tangible assets are those that have a physical form, such as property, plant, and equipment (PPE). These are the physical assets that a business uses to produce its goods or services. They include buildings, machinery, vehicles, and furniture.

On the other hand, intangible assets do not have a physical form but still hold value for the business. These include patents, copyrights, trademarks, goodwill, and brand recognition. These assets are often harder to quantify but can be instrumental in a business's long-term success.

Tangible Assets

Tangible assets are the physical assets that a business owns and uses in its operations to generate revenue. They are often the most significant portion of a company's long-term assets and can include items like land, buildings, machinery, vehicles, and equipment. These assets are typically depreciated over their useful life, which is the period over which they are expected to provide economic benefits to the business.

For a small business, tangible assets might include the business premises, the machinery or equipment used to produce goods or services, and any vehicles used for business purposes. These assets are critical for the day-to-day operations of the business and are often a significant investment. They are also subject to wear and tear, and their value will typically decrease over time due to depreciation.

Intangible Assets

Intangible assets, on the other hand, do not have a physical form but still hold significant value for a business. They include items like patents, trademarks, copyrights, and goodwill. These assets are often harder to quantify but can be instrumental in a business's long-term success.

For example, a small business might own a patent for a unique product or process, which gives it a competitive advantage in the market. Or it might have a strong brand or good reputation, which can attract customers and generate sales. These intangible assets can be a significant source of value for a business, even though they do not physically exist.

Importance of Long Term Assets

Long-term assets are vital for a small business as they provide the resources needed for the business to operate and generate revenue. They are the investments that the business makes to ensure its long-term success and stability. Without these assets, a business would struggle to produce its goods or services, and its ability to generate income would be severely compromised.

Furthermore, long-term assets can also provide a business with a competitive advantage. For example, a business that owns a patent for a unique product or process has a significant advantage over its competitors, as it can produce and sell something that others cannot. Similarly, a business with a strong brand or good reputation can attract more customers and generate more sales than its competitors.

Asset Management

Managing long-term assets effectively is crucial for a small business. This involves regularly monitoring and evaluating the performance of these assets to ensure they are providing the expected benefits. It also involves making decisions about when to replace or dispose of assets, based on their condition and performance.

Effective asset management can help a business to maximise the value it gets from its assets, and to minimise the costs associated with maintaining and replacing them. It can also help to ensure that the business has the resources it needs to operate effectively and to meet its strategic objectives.

Asset Valuation

Valuing long-term assets can be a complex process, as it involves estimating the future benefits that these assets will provide. This often requires making assumptions about future events and conditions, which can be uncertain. However, accurate asset valuation is crucial for a business, as it affects the business's financial statements and can influence decisions made by investors and lenders.

There are several methods that a business can use to value its long-term assets, including historical cost, replacement cost, and fair value. The appropriate method will depend on the nature of the asset and the purpose of the valuation.

Depreciation of Long Term Assets

Depreciation is a method of allocating the cost of a tangible long-term asset over its useful life. It represents the wear and tear on the asset over time, as well as any obsolescence that might occur. Depreciation is an important concept for small businesses to understand, as it affects the value of their assets and their financial statements.

There are several methods of calculating depreciation, including the straight-line method, the declining balance method, and the units of production method. The appropriate method will depend on the nature of the asset and the business's accounting policies.

Depreciation Methods

The straight-line method of depreciation is the simplest and most commonly used method. It involves allocating the cost of the asset evenly over its useful life. For example, if a business buys a machine for �$10,000 and expects it to last for 10 years, it would depreciate the machine by �$1,000 each year.

The declining balance method, on the other hand, involves depreciating the asset more in the early years of its life and less in the later years. This method is often used for assets that lose value quickly, such as vehicles or computers.

The units of production method involves depreciating the asset based on its usage or production. For example, a business might depreciate a machine based on the number of units it produces. This method is often used for assets that wear out with use, such as machinery or equipment.

Impact of Depreciation

Depreciation has a significant impact on a business's financial statements. It reduces the value of the business's assets on its balance sheet, and it is also an expense that reduces the business's profits on its income statement. However, it is important to note that depreciation is a non-cash expense, meaning it does not involve an actual outflow of cash.

Depreciation also has tax implications for a business. In many jurisdictions, businesses can deduct depreciation from their taxable income, reducing their tax liability. This can be a significant benefit for small businesses, as it can help to reduce their tax bill and improve their cash flow.

Amortisation of Intangible Assets

Just like tangible assets, intangible assets also have a finite useful life and lose their value over time. This process is known as amortisation. Amortisation is similar to depreciation, but it is used for intangible assets like patents, copyrights, and goodwill.

Amortisation involves allocating the cost of an intangible asset over its useful life. The method used to calculate amortisation will depend on the nature of the asset and the business's accounting policies. However, the straight-line method is commonly used, as it is simple and straightforward.

Amortisation Methods

The straight-line method of amortisation is similar to the straight-line method of depreciation. It involves allocating the cost of the asset evenly over its useful life. For example, if a business buys a patent for �$10,000 and expects it to last for 10 years, it would amortise the patent by �$1,000 each year.

Some intangible assets, however, may have a variable pattern of benefits. In such cases, an accelerated method of amortisation may be more appropriate. This method involves amortising the asset more in the early years of its life and less in the later years, reflecting the pattern of benefits that the asset provides.

Impact of Amortisation

Amortisation has a similar impact on a business's financial statements as depreciation. It reduces the value of the business's intangible assets on its balance sheet, and it is also an expense that reduces the business's profits on its income statement. However, like depreciation, amortisation is a non-cash expense, meaning it does not involve an actual outflow of cash.

Amortisation also has tax implications for a business. In many jurisdictions, businesses can deduct amortisation from their taxable income, reducing their tax liability. This can be a significant benefit for small businesses, as it can help to reduce their tax bill and improve their cash flow.

Conclusion

Understanding the concept of long-term assets is crucial for small business owners. These assets, whether tangible or intangible, provide the resources necessary for the business to operate and generate revenue. They are the investments that the business makes to ensure its long-term success and stability.

Managing these assets effectively, understanding their value, and accounting for their depreciation or amortisation are all important aspects of running a successful business. By doing so, small business owners can ensure that they are making the most of their assets and setting their business up for long-term success.