Machinery is considered at the accounting level as the set of tangible goods that are dedicated to production, a specific activity or utility.
Therefore, it is an asset that belongs to the subgroup of non-current assets and therefore, its useful life is intended to be long.
Machinery in accounting
On the asset side, companies usually have a proportional volume of current and non-current assets with their equivalents in liabilities, that is, with current and non-current liabilities.
With this, what we want to arrive at is that normally when a company has a great value in machinery or other non-current assets, it is usually related to a strong long-term indebtedness. That is, the useful life of the asset is almost always at least the size of the liability’s amortization period.
We can give as an example of this situation the financed acquisition of a car. On a regular basis, the financing of this type of acquisitions does not exceed 8 years, although the asset may last 20 years. This is because if the owner decided to sell the car before the loan matured, he could theoretically cancel the requested financing with the proceeds of the sale.
Examples of machinery in accounting
If we put ourselves in the case that a company acquires a type of machinery, it would be done such that (VAT 21%):
In addition, after each financial year, we must amortize the proportional value that touches it, depending on the criteria that we have established at the accounting level, such as linear amortization, by use, etc.
In this way, we can see that of the total value of € 1,000 of the purchased machinery, we have theoretically set an expected useful life of 10 years, so if we divide € 1,000 of initial value between the estimated 10 years of use, results in € 100 of technical impairment in the form of amortization.
In other words, at the beginning of the second year, the machinery that we acquire at the time will have a book value of € 900.