What is premises in accounting
In accounting, "premises" refers to the physical property and buildings owned or leased by a business that are used for its operations. This term encompasses all real estate assets that are part of the business's infrastructure. Here are key points about premises in accounting:
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Definition: Premises include land and buildings that a company owns or leases and uses for business activities, such as offices, factories, warehouses, and retail stores.
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Asset Classification:
- Fixed Assets: Premises are classified as fixed assets (also known as property, plant, and equipment) on the balance sheet because they are long-term assets used in the production of income.
- Depreciation: Buildings (but not land) are subject to depreciation, which is the systematic allocation of the cost of the asset over its useful life.
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Cost Components:
- The cost of premises includes the purchase price, legal fees, survey fees, and any other costs directly attributable to bringing the premises into use.
- For leased premises, costs might include leasehold improvements, which are expenditures to enhance or adapt the leased property for business use.
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Accounting Treatment:
- Initial Recognition: Premises are initially recorded at cost.
- Subsequent Measurement: After initial recognition, premises can be measured using either the cost model (cost less accumulated depreciation and impairment losses) or the revaluation model (fair value at the date of revaluation less subsequent depreciation and impairment losses).
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Balance Sheet Presentation:
- Premises are shown under the category of non-current assets on the balance sheet.
- Details about premises, including depreciation methods and useful lives, are typically disclosed in the notes to the financial statements.
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Impact on Financial Statements:
- The acquisition or improvement of premises affects the cash flow statements under investing activities.
- Depreciation expense related to premises impacts the income statement, reducing net income.
Understanding the accounting treatment of premises is crucial for accurately reflecting a company's financial position and ensuring compliance with relevant accounting standards.
