Long-term assets are assets that will be used for longer than one year, such as plant assets and long-term investments.
Short-term assets, also known as current assets, are assets that are converted to cash, used up, or sold within one year.
|Long-Term Assets||Short-Term Assets|
|Assets that will be used for longer than one year, such as plant assets and long-term investments||Assets that are converted to cash, used up, or sold within one year|
|One Year or More||One Year or Less|
Now, how do we determine the classification of an asset, whether it is long-term or short-term? Well, we need to consider the nature of the asset, referring to how long it is meant to last. We also need to consider the nature of the use, meaning is it an asset we're going to use up within one year or less, or will it provide use over multiple years?
Long-term assets can also be referred to as capital assets or fixed assets; these terms are interchangeable.
There are two broad categories within long-term assets:
Real property is resources that have physical characteristics and are used in business operations. Note, the important piece of this definition is that they are used in business operations.
EXAMPLEExamples of real property include things like land, land improvements, and buildings. These are typically going to be real estate, from which the term real property derives.
Personal property is tangible and intangible assets that are transferable among individual owners.
EXAMPLEPersonal property includes things like computers, company cars, as well as equipment--all items that can be transferable. And then equipment also falls into this personal property category.
Book value is the cost of a depreciable asset less its accumulated depreciation. So, how do we determine book value? Well, book value of an asset includes the cost of the asset and any cost incurred getting that asset ready for use within the business.
In the case of real property, which includes things like land and buildings, or real estate, the types of costs that would contribute to the cost of an asset are:
The types of costs that would contribute to the total cost of personal property assets, such as equipment, automobiles, or computers, are:
Source: Adapted from Sophia instructor Evan McLaughlin.