Before we start discussing about the effects that purchasing an office space has on the balance sheet, it is important to understand what the balance sheet and the accounting equation is and its importance for a business.
The accounting equation, which is the most significant equation in the universe of accounting, is quite simple:
Assets – Liabilities + Shareholder’s Equity
Assets are the things or objects that a company owns which have an economic value. These are generally things which the company can use to gain money. Assets are considered a resource for the business.
Liabilities are claims on the assets that are given upon by people other than the owner of the business. These are the debts that the owner owes to his suppliers from whom he has taken the assets. These suppliers have a claim on their cash.
When the liabilities have been paid, the thing that is left by is the shareholders’ equity. This is what the owner can call his own or claim to in his business. If the business if solely made by one person, then the equity goes to the owner. If the business is incorporated, then it goes to the shareholders in terms of shares.
The assets are what the company can use which include things like cash, inventory, relievable accounts, etc.
All of the three elements ultimately go on to the balance sheet made by the company. This shows the financial position in terms of business.
The liabilities are taxes and such things. The shareholder’s equity is both the money that the owners put in the business in the start and any gains or losses that have happened in the business since.
How is office space accounted for? Do you consider it as expenses or assets? If you happen to buy an office area, then it can be used for a long period of time, hence when it exceeds its accounting period, it can be counted as an asset.
On the other hand, if you rent an office area, you are likely to keep paying for it for a long time till it expires its expiry date. It involves a risk of liability from the suppliers if you aren’t able to pay off the debt.
There is a matter of how you use the office area that you have purchased. If you paid the money on cash, it is likely that it will be used for more than the accounting period. This reduces your cash asset and the office purchase account increases in the current assets. There is a balance in the accounting sheet and the purchase is recorded in the cash accounts.
On the other hand, if you buy the office with credit, and if it is a large amount, which an office space generally is, and you are likely to use it for more than one accounting period, then your liabilities increase as well as your current assets. As a result, there is a balance in your accounting equation. A purchase of supplies on the account is recorded in the liabilities and supplies accounts. In both the ways the assets will stay the same because the decrease in one asset matches with the increase of another.