by George Smith, Student Reporter
Let’s take a personal finance lesson.
I can break this down real simple.
There are two types of budgeting accounts. For those two types of budgets, two types of assets are assigned.
An asset is a thing you own that is capable of holding value, after it is purchased.
If you have a cellphone and a vehicle, you have two assets that are filed in the two categories: Current and Capital, respectively.
In simpler terms, your phone is a current asset and your car is a capital asset. Why? Because your phone is less valuable than your vehicle and will lose its value quicker.
Current assets hold their value for a few years or less, just like your phone. After a year or two there will be a new phone available to buy and your “current” phone will no longer be worth its original expected depreciated value.
Depreciation (duh-pre-she-a-shun) is a phenomenon, or a “thing,” that happens to assets when they decline, or get lower, in value over time.
After the newest model phone is available, your phone declines much more in value. The amount of decline is referred to as depreciation. Most assets will experience depreciation throughout their lifetime, but some assets can appreciate, or go up in value, such as land, and some classic or luxury cars.
Your car, however, likely depreciates in value, but because it began at a higher value, it depreciates through a longer time period.
Some of you may have heard about what happens to a new cars value, moments after driving it off the lot? It loses thousands of dollars in value. That’s both true, and untrue. If you were to whip out of the lot, cruise to the nearest gas station and bring it back to the dealer, you aren’t going to get back what you paid for it because you bought it at a price that made the dealership money, a premium, however, if you wanted to sell it to a friend that same day, you could likely sell it for more, because the full tank of gas adds value.
If you — let’s just be honest, your parents bought your car — if your parents bought you a car, then that car is depreciating in value right now. Alva roads are rough, every large bump stresses your suspension wearing it down further, every race at a stoplight puts stress on your motor and ever corner you take too fast, too hard or too sharp wears on the performance of that golden chariot you didn’t have to pay for. Thanks, dad.
Now these wears and tears and bumps and scratches will take years to actually have an affect on the overall performance of the vehicle. Therefore, vehicles are deemed as capital assets. Which are assets that depreciate over an extended period of time — usually longer than three years.
So now that we have the terms learned in a way that applies to some of you, let’s talk about funding a budget.
Northwestern’s budget is funded primarily through tuition fees. Whenever you spend money taking a class, you are paying the school money that it uses to pay the teachers and make repairs to the school. Those two uses for the money paid in are in two different budgets.
Whenever teachers are paid with the money that students pay to the school to take classes, they are being paid from the current asset budget. Dr. David Pecha, vice president for administration, probably has different sub-budgets and calls them something else, but for all intents and purposes in this story there are only two budgets that the school has: current and capital.
Whenever repairs are made to the school’s infrastructure, they are paid for through the capital budget.
See how budgets and assets are known under the same terms because they fall into the same categories? It’s like that on purpose.
Economists and accountants would like you to think that their job is tough, but it’s not. You just have to be smart enough to know the difference between current and capital budgets and assets because the lines are blurred sometimes.
Take your backpack for example. In this example you need to examine a few things:
- Did you pay for your backpack or did your parents pay for it?
- How old is your backpack? Less than or more than three years?
In this example, your parents are the capital budget and you are the current.
Your backpack has the potential to be both a current and a capital asset, which makes it difficult to determine what type of asset it is, so, accountants use the context of the purchase to determine whether it is a current or capital asset.
Did you pay for it with your current, or capital budget?
If you paid for your backpack and it is less than three years old, it is obviously a current asset.
If your parents paid for your backpack and it is more than three years old, you probably need a new one, but it is technically a capital asset.
But what if your parents paid and your backpack is less than three years old, or you paid for your backpack, but it is more than three years old?
It all depends on the context of the purchase. This is where economists and accountants come in to save the day and decide for you. If it’s paid for with your current budget, they label it a current asset and so on.
You didn’t learn any of this stuff in high school because you weren’t meant to do it yourself. CPA’s often work with a team. Ever wonder why banks are so big? Lots of people are needed to make sure money goes where it should.
Budgeting is tough, but you don’t need to make more money to be better at it. Trust me, I used to be a business student.