Own A Business? All You Need To Know About Business Asset
All You Need To Know About Business Asset
If you own a business, are turning a side hustle into a business or are looking to expand you’ve probably looked at a multitude of assets that can help your business grow.
However, it can be hard sometimes to know which assets to pay for, how to pay for them from a finance perspective, and also how to treat them when you’re drawing up your accounts.
Here, we look at business assets and try to give you some top level information to help you make the best decision for your business.
What Is A Business Asset?
Essentially, a business asset is a piece of property or equipment that has been purchased for business use. For example, you might buy a new computer that’s better at doing what helps drive revenue to your business. It can also be something way larger, like a building from which you want to do business.
The assets can also be intangible, which pretty much means it isn’t a physical asset and can include things such as intellectual property.
Each business might have a different level of assets under their control, depending on their operation. Some might purchase their assets outright, some might like to lease them. Leasing of assets is a more popular option and we’ll look at the accountancy treatment shortly.
How To Acquire Assets
It sounds like a stupid question because realistically you just buy them. However, you might buy them on a lease agreement, whereby you pay for them over time, or buy them outright. If you do buy them over time it’s likely you’ll be looking at a capital/finance lease or an operating lease.
The key here is to try and get the best possible deal for you and your business. Remember, over the years the item you’re leasing might lose value, so bear this in mind.
You need to look at the contractual obligations you’re signing your business up to and make sure they’re favorable.
The Right Of Use Asset (ROU): Accounting For Leases
If you buy an asset outright, it goes on the balance sheet. If you lease an item, it also goes on the balance sheet. To an outsider this might put two companies on the same level as theoretically they both own the same asset.
The difference is that one is owned outright, and one is leased meaning one business has less liabilities and as such, should be valued at a higher point.
This is why ASC 842 was recently released and is targeted at improving lease transparency. So, what is a right of use asset? An ROU (right of use asset) simply represents the lessees (person paying for the item) authority to utilize the leased item over the duration of the lease term.
At the end of the term you might pay the loan off and keep the property, or else hand it back. Under ASC 842 calculating and accounting for an ROU asset is largely unchanged from the previous accounting standard.
So, you need to properly be able to calculate the right of use asset under the new accounting standard ASC 842. If you’re using an accountant, or accounting software this can be fairly straightforward.
All you have to do is: start with the initial amount of of the lease liability which you get to by discounting the remaining lease payments, and then you + the outstanding balance of prepaid rent or – the cumulative remaining deferred rent + indirect costs – lease incentives paid at or before commencement.
For your complex, expensive leases it’s important to do the math and make sure you’re accounting for them properly otherwise you could be losing money.
There, simple. You know what leases are, how to best approach using them for your business and how to account for them fairly.