Asset

Definition; An asset is property, good or any resource that is owned by an individual, institution or an organization and can be assigned a monetary value. It is classified in to manifold categories based on the criteria used. For instance;

a)   Fixed asset and current asset are based on the time duration the asset exists in the business.

b)   Tangible or intangible assets are based on the nature of existence whether the asset is physically visible or invisible

Fixed assets are properties or goods owned by an organization for a period of more than one financial year. They have a unique feature of losing their economic value on usage through process of depreciation known as wear and tear. For example, fixtures and fitting, motor vehicle, machinery, office equipment, loose tools and plants (heavy earth moving machinery). Other properties categorized as fixed assets are land and buildings although they don’t undergo wear and tear. But for the sake of easy understanding of balance sheet components, these two assets are termed as part of fixed assets. It should be noted that fixed assets are also referred to as non-current assets.

Current asset is property or good that exists in the business premises for a period of one financial year or less. They don’t undergo wear and tear process and they include; cash in hand, cash at bank, debtors, stock, unused stationery, prepayments and accrued income. It should be noted that most students face difficulties in categorizing the assets into fixed and current. To help you out of this dilemma, especially for the non-accounting learners, one has to differentiate between capital expenditure and revenue expenditure of the business. This is usually clearly guided by the nature of the business in question. Therefore, it is advisable for one to establish the nature of the organization by interrogating that firm’s memorandum of association which comprise five clauses one of them being OBJECT clause. It is this clause which govern and guide the concerned party on whether to classify a firm’s asset as of revenue or capital expenditure in nature. This will be further explained in  level two accounting tutorial series on end of year adjustments for trading account components where by the emphasis is on a scenario one accounting treatment of sales and purchases. For now, let us discuss the distinguishing features of the two types of expenditures. There we go.

Revenue Expenditure and Capital Expenditure

The most difficult task for the entrepreneur or the learner in accounting is to distinguish whether an asset is a fixed or a current one. Hence, the entrepreneur may not categorically tell which assets in his/her business premises belong to fixed or current assets. As a result, some goods/assets are classified as inventory or fixed assets. To show this demarcation, the entrepreneur/learner should basically appreciate the primary intension or purpose of purchasing the asset by the organization for this is what determines whether it is a fixed asset or otherwise.

For a start, if an organization purchases property or a good for further production of goods and services or for helping in the day to day running of the business, the asset acquired is classified as a fixed asset, sometimes referred to as capital good. For instance, if an organization deals with provision of services like medical care or it is a manufacturing firm, acquisition of property such as fixtures and fitting, motor vehicle, machinery, office equipment, loose tools and plants (heavy earth moving machinery), land and buildings, will be categorized as fixed assets. On acquiring them, a corresponding ledger account named after the acquired fixed asset is opened. For example, if the business purchases office equipment, an office equipment account will be opened for this is a case of capital expenditure. On the other hand, if the organization acquires the same fixtures and fittings, motor vehicle, machinery, office equipment, loose tools and plants (heavy earth moving machinery) land and buildings with an intension of reselling them, especially when the ordinary business activity of the firm is buying to resale in the future to make profits, then such goods will be treated as inventory for it is a case of revenue expenditure.

The learner should notice that in both cases of capital expenditure and revenue expenditure, the same assets have been used. This is intended to emphasize that the primary purpose of acquiring such an asset dictates where it will be classified. That is the reason why in some organizations, motor vehicle is a fixed asset if it is used for the day to day operations. Whereas, in another organization, like the car dealer organization it is classified as inventory which is a current asset for the intension of acquisition was for re-selling to make profit. In summary, the concept of capital and revenue expenditure can be precisely differentiated as per table below

Table:  Capital and Revenue Expenditure

 

Capital Expenditure

 

Revenue Expenditure

1

Intention of purchasing the good is to help in the day to day operations of the business

1.

Intention of purchasing the good is for reselling or ordinary business activity

2

Good acquired-are categorized as capital good

2

Good acquired-are categorized as inventory

3

A corresponding fixed asset account is opened on purchase of capital goods. Eg machinery-machinery a/c

3.

A purchases account is opened on purchase of revenue goods. Eg machinery a/c-purchases a/c

 4

If capital good is sold ie disposed, the account used to determine capital gain or loss on disposal is fixed asset disposal account eg Machinery disposal account is opened

4.

If good categorized as inventory is sold, the account used to determine revenue gain or loss on sale is trading account eg sale of Machinery, trading a/c is opened.

5

Capital gain/loss is not recognized by the tax man as an operating gain/loss when determining tax liability

5

Revenue gain/loss is recognized by tax man as an operating gain/loss when determining tax liability