Are Buildings Current Assets on a Balance Sheet?
Understand how buildings are classified on a company's balance sheet. Learn typical rules, exceptions, and their financial implications.
Businesses rely on resources, known as assets, to operate and generate income. Assets hold economic value. Understanding how these assets are categorized and presented on the balance sheet is important for assessing a business’s financial standing. Proper accounting classification ensures transparency and provides insights into what a company owns.
Fundamental Asset Categories
Assets are broadly classified into two main categories based on their liquidity and intended use: current assets and non-current assets. Current assets are those a company expects to convert into cash, consume, or sell within one year or one operating cycle, whichever is longer. These assets are liquid and crucial for short-term operational needs. Examples include cash, accounts receivable (amounts owed by customers), and inventory (goods held for sale).
Non-current assets, also known as fixed or long-term assets, are resources not expected to be converted into cash within one year. These assets are held for long-term use in business operations and generate revenue over extended periods. Examples include machinery, equipment, land, and buildings.
Classifying Buildings on the Balance Sheet
Buildings are generally classified as non-current assets on a company’s balance sheet. They fall under Property, Plant, and Equipment (PP&E), which represents tangible fixed assets used in operations. Businesses acquire buildings, such as factories or retail stores, for long-term use in core activities, not for short-term resale. This long-term operational purpose is the primary reason for their non-current classification.
The cost of a building, excluding the land, is systematically expensed over its estimated useful life through depreciation. For U.S. tax purposes, nonresidential real property, which includes most commercial buildings, is depreciated over 39 years using a straight-line method. Residential rental property has a shorter depreciation period of 27.5 years. This depreciation reflects the gradual wear and tear, obsolescence, or consumption of the building’s economic benefits over time.
Significance of Asset Classification
Proper asset classification on the balance sheet provides insights into a company’s financial position. This distinction helps financial analysts and investors assess a company’s liquidity, its ability to meet short-term financial obligations. A healthy proportion of current assets relative to current liabilities indicates strong short-term financial flexibility.
Beyond immediate liquidity, asset classification also sheds light on a company’s solvency, its capacity to meet long-term obligations. Non-current assets, like buildings, represent a company’s long-term operational capacity and foundation for generating future earnings. The balance sheet is structured to present assets in order of their liquidity, with current assets listed first, followed by non-current assets. This organized presentation allows stakeholders to understand the composition of a company’s assets and evaluate its overall financial structure.
Special Cases for Building Classification
While buildings are generally classified as non-current assets, their classification might differ in specific scenarios. For instance, a real estate developer or construction company that acquires properties for near-term sale would classify these buildings as inventory. In this context, inventory is a current asset because these properties are held for short-term sale, similar to how a retailer holds merchandise.
Another exception occurs when a company decides to sell a building previously used in its operations. If certain criteria are met, such as availability for immediate sale and high probability of sale within one year, the building may be reclassified as “Assets Held for Sale.” This reclassification signals a change in management’s intent from long-term use to short-term disposal. For most operating businesses, however, buildings remain classified as non-current assets, reflecting their role as long-term operational resources.