What Type of Account Is Equipment in Accounting?
Understand the fundamental accounting classification of equipment, its financial journey through a business, and its portrayal in company reports.
Proper accounting classification is fundamental for accurate financial reporting. It organizes financial information into distinct categories, such as assets, liabilities, and equity. This systematic arrangement provides a clear view of a company’s financial health, essential for internal management and external stakeholders, and aids in informed decision-making and strategic planning.
Equipment as a Fixed Asset
Equipment is classified as a fixed asset, also known as a long-term asset, non-current asset, or Property, Plant, and Equipment (PP&E). Fixed assets are tangible items a company owns and uses in its operations to generate revenue over an extended period. They are not intended for sale and are expected to have a useful life of more than one year.
Common examples include machinery, vehicles, office furniture, computers, and specialized tools. This classification distinguishes equipment from current assets, such as cash, inventory, or accounts receivable, which are expected to be converted into cash or consumed within one year. Fixed assets are less liquid than current assets, meaning they cannot be easily converted to cash.
Key Accounting Treatments for Equipment
Once equipment is acquired, it is recorded at its initial cost, a process known as capitalization. This cost includes the purchase price and all necessary expenditures to get the equipment ready for its intended use. Such costs include shipping, installation fees, and testing expenses.
Following capitalization, equipment is subject to depreciation, which is the systematic allocation of its cost over its estimated useful life. Depreciation matches the expense of using the asset with the revenue it helps generate over time, rather than recognizing the entire cost in the year of purchase. The straight-line method calculates annual depreciation by subtracting the estimated salvage value from the equipment’s cost and dividing by its useful life in years. Accumulated depreciation is a contra-asset account that represents the total depreciation charged against an asset since its acquisition, reducing its book value on the balance sheet.
Impact on Financial Statements
Equipment and its accounting treatments impact a company’s financial statements, providing perspectives on its financial position and performance. On the balance sheet, equipment is presented as a non-current asset under the “Property, Plant, and Equipment” section. It is reported at its original cost less accumulated depreciation, resulting in its net book value.
On the income statement, periodic depreciation expense for the equipment reduces the company’s reported profit or net income. This reduction reflects the cost of using the asset during the accounting period. While depreciation is an expense, it is a non-cash expense, meaning it does not involve an actual outflow of cash in the period it is recorded.
The purchase or sale of equipment is reflected on the cash flow statement under investing activities. This section highlights the cash used for acquiring long-term assets or cash received from their disposal. This classification helps users understand how a company’s cash is used for long-term investments.