When a company buys an asset, it will have specific impacts on the three primary financial statements: the Income Statement, the Balance Sheet, and the Cash Flow Statement. Let's examine each statement's impact:
Balance Sheet: On the Balance Sheet, the purchase of an asset will affect two key items:
Assets: The asset will be recorded on the Balance Sheet as a non-current or long-term asset, depending on its expected useful life. The cost of the asset, including any acquisition costs (e.g., taxes, shipping, installation), will be added to the appropriate asset category on the Balance Sheet, such as Property, Plant, and Equipment (PP&E) or Intangible Assets.
Liabilities: If the company financed the asset purchase through debt or a loan, a corresponding liability will be recorded on the Balance Sheet. This liability represents the amount of money the company owes to the creditor or lender for the asset purchase.
Income Statement: The purchase of an asset does not have an immediate impact on the Income Statement. It is not recognized as an expense on the Income Statement at the time of purchase. Instead, the cost of the asset is capitalized and gradually expensed over its useful life through depreciation or amortization.
Cash Flow Statement: On the Cash Flow Statement, the purchase of an asset will affect the "Cash Flow from Investing Activities." The cash outflow from the asset purchase will be included as a negative value in this section of the Cash Flow Statement. This shows that cash was used for investing in the acquisition of the asset.
For example, if a company buys a piece of machinery for $50,000 and finances the purchase with a $30,000 loan, the impact on the financial statements would be as follows:
Balance Sheet:
Assets: Machinery (non-current asset) increases by $50,000
Liabilities: Long-term loan increases by $30,000
Income Statement: No impact at the time of purchase
Cash Flow Statement:
Cash Flow from Investing Activities: Cash outflow of $50,000
Over the asset's useful life, the company will gradually recognize the depreciation expense on the Income Statement and the corresponding reduction in the value of the asset on the Balance Sheet, reflecting the consumption of the asset's economic benefits over time.