3 Min. Read
March 30, 2023
Land is a long-term asset, not a current asset, because it’s expected to be used by the business for more than one year. Current assets are a business’s most liquid assets and are expected to be converted to cash within one year or less. Because land is one of the longer term investments that a business can own, it is categorized as a fixed asset on a business’s balance sheet.
These topics will help you understand why land is classified as a long-term asset:
Is Land a Current Asset or Long-Term Asset?
What Are the Different Types of Assets?
Is a Building a Current Asset?
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
Is Land a Current Asset or Long-Term Asset?
Land is classified as a long-term asset on a business’s balance sheet, because it typically isn’t expected to be converted to cash within the span of a year.
Land is considered to be the asset with the longest life span. Land cannot be depreciated, meaning you cannot account for its cost by gradually reducing its value over its useful life span. As a result, the useful life span of land is considered to be basically eternal. Because land is typically the least liquid asset a business owns, it’s classified as a fixed asset on your balance sheet.
A balance sheet is one of the three major financial statements that a small business will prepare to report on its financial position. The balance sheet lists a business’s assets, liabilities and shareholders equity, at a specific point in time. It gives a snapshot of what a business owns and what it owes to others.
What Are the Different Types of Assets?
There are two main types of assets that are listed on a business’s balance sheet. The main categories of assets are:
- Current Assets: Current assets are a business’s most liquid assets and are expected to be converted to cash within one year.
- Long-Term Assets: Long-term assets (also called non-current assets) are items of value not expected to be converted to cash within one year.
Example of Current Assets
Current assets are short-term assets that will be turned into cash within a year. Some examples of current assets include:
- Cash
- Cash equivalents, like foreign currency, checks that you haven’t yet cashed and money kept in your checking and savings accounts
- Marketable securities, like investments that will be sold within a year
- Inventory, including finished products and raw materials
- Accounts receivable, which includes the money owed to you by clients for recent invoices
- Prepaid expenses for things like your office rent or utilities
Example of Long-Term Assets
Long-term assets won’t be converted to cash within a year. Some examples of long-term assets include:
• Land
• Property
• Buildings
• Machinery
• Equipment
- Long-term securities:
• Stocks that won’t be sold for cash in a year
• Bonds that won’t be converted to cash in a year
- Intangible assets:
• Copyrights
• Patents
• Franchise agreements
• Goodwill
Is a Building a Current Asset?
Buildings are not classified as current assets on the balance sheet. Buildings are long-term assets categorized under the fixed asset account. Just like land, buildings are long-term investments that a company typically holds onto for several years.
The main accounting difference between land and buildings is that a building’s value is depreciated whereas land is not subject to depreciation.
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How to Calculate Goodwill of a Business: Step-By-StepI've got a firm grip on accounting principles and asset classification. Land is a classic example of a long-term asset because it's not anticipated to be liquidated or converted into cash within a year. That's the essence of the distinction between current and long-term assets on a balance sheet.
Now, breaking down the concepts from the article:
1. Asset Classification - Land: Land is categorized as a long-term asset because it's not expected to be converted into cash within a year. It's a fixed asset due to its extended utilization by a business.
2. Types of Assets:
-
Current Assets: These are highly liquid assets meant to be converted into cash within a year.
- Examples include cash, cash equivalents, marketable securities, inventory, accounts receivable, and prepaid expenses.
-
Long-Term Assets: Non-current assets not intended for conversion to cash within a year.
- Examples encompass fixed assets (like land, property, buildings, machinery, and equipment), long-term securities (stocks, bonds), and intangible assets (copyrights, patents, goodwill).
3. Building as an Asset: Similar to land, buildings fall under long-term assets on a balance sheet and are considered fixed assets. However, buildings undergo depreciation in value unlike land, which is typically perpetual and isn't subject to depreciation.
The article delves into fundamental accounting principles, highlighting the critical distinction between current and long-term assets. It emphasizes how these assets are recorded on a balance sheet and underscores the differences in treatment, particularly in terms of depreciation for certain assets like buildings versus perpetual value for land.
