Is a Building a Current or Non-Current Asset?

Accurate financial reporting relies on classifying business items correctly on a company’s balance sheet. This financial statement provides a snapshot of a company’s financial health at a specific moment. Proper classification of assets and liabilities allows stakeholders, such as investors and creditors, to assess a company’s liquidity and solvency.

Understanding Assets

In accounting, an asset is a resource controlled by an entity as a result of past events, from which future economic benefits are expected to flow. Assets can take various forms, including physical items like machinery and real estate, or non-physical items such as patents.

What are Current Assets

Current assets represent resources a company expects to convert into cash, use up, or sell within one year or one operating cycle, whichever is longer. Their short-term liquidity means they can be easily and quickly turned into cash without significant loss of value. These assets are important for a company’s day-to-day operations and its ability to cover immediate financial obligations.

Common examples of current assets include cash and cash equivalents, which are the most liquid. Accounts receivable, representing money owed to the company by customers, and inventory, which are goods available for sale, are also classified as current assets. Prepaid expenses, such as rent or insurance paid in advance but not yet consumed, also fall into this category.

What are Non-Current Assets

Non-current assets, also known as long-term assets or fixed assets, are investments a company intends to hold or use for more than one year or one operating cycle. Unlike current assets, these are not primarily acquired for quick conversion to cash but for their long-term contribution to business operations. They are less liquid, meaning they cannot be easily or quickly converted into cash.

Examples of non-current assets include property, plant, and equipment (PP&E), which encompasses land, buildings, and machinery used in production. Long-term investments, such as bonds or stocks held for an extended period, also qualify as non-current assets. Intangible assets, like patents, trademarks, and goodwill, which lack physical form but provide future economic benefits, are another type of non-current asset.

Classifying Buildings

A building is classified as a non-current asset on a company’s balance sheet. This classification stems from its intended use and long-term nature; buildings are acquired for operational purposes and are expected to provide economic benefits over many years, not just within a single accounting period. They are a component of Property, Plant, and Equipment (PP&E), which are tangible assets for a business’s ongoing operations.

For tax purposes, the Internal Revenue Service (IRS) assigns a useful life of 39 years for commercial buildings. This allows businesses to deduct a portion of the building’s cost each year through depreciation, accounting for its wear and tear over time. Land on which a building stands is not depreciable because it is considered to have an indefinite useful life. When calculating depreciation, only the value of the structure itself is considered.