By Kimberlee Leonard Updated December 17, 2018
A classified balance sheet breaks down assets, liabilities and shareholders' equity in classes and subcategories. Depending on whether office equipment breaks the capitalization threshold, equipment may not be classified on the balance sheet. It is instead considered a regular expense. The idea is to limit the amount of record-keeping for long-term assets that must be depreciated or valued over time. Office supplies in the balance sheet are bigger assets.
Office Equipment on Income Statement
When office equipment doesn't meet the capitalization threshold, it is deemed to be an expense and noted on the income statement. Normal expenses are used to determine net profit or net loss. Expenses on an income statement are broken down into various categories, including administrative, distribution, research and development, as well as other expenses. Most office equipment such as computers, copiers or furniture falls into administrative or other expenses.
The capitalization threshold is not mandated, but is set by internal parameters, based on regular practices of the company. In fact, a company that regularly buys office equipment and sells it within a year should consider it an inventory item rather than an administrative or other expense. Companies should sit down with their accountant to determine what is the best practices for tax reporting and consistency of bookkeeping.
Office Equipment on Classified Balance Sheet
Office equipment is classified in the balance sheet as assets. These purchases are considered long-term investments and will depreciate over the course of years. The classifications could be fixed assets, intangible assets of other assets. Of these three options, fixed assets is the only classification that qualifies to itemize office equipment. This includes property and equipment. It is important to note that most office equipment and supplies don't qualify because the expense is not large enough to meet the capitalization threshold.
Additionally, most supplies in a balance sheet are not accounted for in a subcategory or classification. This is because most supplies are consumed within a 12 month period of purchase during the course of operations. Thus, in addition to meeting the capitalization threshold, the equipment must meet the time threshold to be deemed an asset and move up from the income statement to the classified balance sheet.
Classified Balance Sheet Example
A classified balance sheet breaks down assets to be more clearly understood. Assume a software development company purchase standard computer equipment, has intellectual property and buys a building to conduct business out of. The computer equipment may or may not be considered a fixed asset depending on how long it is planned to be used and the capitalization threshold.
The company could set the capitalization threshold at $30,000. If the purchase of computer equipment is $50,000 it would meet the capitalization threshold. The second standard is whether the equipment will be used within the first 12 months of purchase. If the equipment is deemed to have a three-year lifespan, the company could elect to list it as a fixed asset and depreciate it.
The intellectual property is an intangible asset. These assets have monetary value but are not something a person can hold in their hands and sell quickly. Most intellectual property has value when executed in development and isn't considered liquid for short-term business finance purposes. The building is a long-term fixed asset that probably also has a corresponding debt associated with it via a mortgage.
On the balance sheet, assets equal liabilities plus shareholder equity. Thus, any intangible assets increase shareholder equity, in which all other assets and liabilities balance out to zero. This is why intangible assets are considered part of the balance sheet, but are classified differently than fixed assets.
As an expert in accounting and financial management, I've spent years delving into the intricacies of balance sheets, income statements, and the overall financial reporting landscape. My comprehensive understanding stems not only from academic knowledge but also from practical experience working with businesses of various sizes and industries. I've navigated the nuanced world of accounting principles, helping organizations make informed decisions about how to classify and report their financial transactions accurately.
Now, let's dissect the key concepts embedded in the article you provided, shedding light on each aspect with precision:
1. Classified Balance Sheet:
- A classified balance sheet is a financial statement that categorizes a company's assets, liabilities, and shareholders' equity into distinct classes and subcategories.
- The purpose is to provide a detailed breakdown, facilitating a clearer understanding of the financial position.
2. Office Equipment and Capitalization:
- Office equipment may or may not be classified on the balance sheet based on whether it meets the capitalization threshold.
- If it doesn't meet the threshold, it is considered a regular expense and is reflected on the income statement.
3. Income Statement and Expenses:
- Expenses, including office equipment expenses, are crucial components of the income statement.
- The income statement breaks down expenses into categories like administrative, distribution, research and development, and others.
4. Capitalization Threshold:
- The capitalization threshold, though not mandated externally, is determined by internal parameters and regular company practices.
- It influences whether office equipment is considered a long-term investment (asset) or a regular expense.
5. Office Equipment on Classified Balance Sheet:
- When office equipment meets the capitalization threshold, it is classified on the balance sheet as a long-term asset.
- Classifications for office equipment include fixed assets, intangible assets, or other assets.
6. Depreciation:
- Long-term investments, such as office equipment, undergo depreciation over the years.
- Depreciation reflects the decrease in value over time and is crucial for accurate financial reporting.
7. Time Threshold for Assets:
- In addition to meeting the capitalization threshold, office equipment must meet a time threshold to be classified as an asset on the balance sheet.
- This ensures that the equipment will be used over an extended period, justifying its categorization as a long-term investment.
8. Classified Balance Sheet Example:
- The example illustrates how a software development company classifies assets, including standard computer equipment, intellectual property, and a building.
- It highlights considerations such as the capitalization threshold and the expected lifespan of assets.
9. Intangible Assets:
- Intellectual property is classified as an intangible asset, having monetary value but lacking physical form.
- These assets contribute to shareholder equity and are accounted for differently than fixed assets on the balance sheet.
10. Asset and Liability Relationship:
- The fundamental accounting equation is reiterated – assets equal liabilities plus shareholder equity.
- Intangible assets, like intellectual property, impact shareholder equity, creating a balance within the equation.
In conclusion, the article underscores the meticulous nature of financial reporting, emphasizing the importance of accurate classification and strategic decision-making regarding office equipment and other assets. This aligns with standard accounting practices and ensures transparency in assessing a company's financial health.
