The fundamental concept of accounting for operating asset acquisitions calls for them to be recorded at their original cost. Three sub-concepts guide practice: In this article, considerations related to each of the above sub-concepts are discussed in more detail. The goal of identifying the costs of making an asset ready for use is to distinguish the amounts that produce benefits only in the current period from those that result in future benefits. The costs in the first group are treated as expenses of the current period, but those in the second group are capitalized. That is to say, they are recorded in a permanent account and expensed in future periods. The costs of making the asset ready for use include such things as obtaining the legal right to use it (either by purchase or lease), transportation to the place in which it will be used, installation, testing, and breaking in. To the extent that these costs can be identified and measured, they should be debited to the asset account rather than an expense account. Therefore, it is noteworthy that while most costs can be identified fairly easily, others are more complex. For example, the costs of training personnel to operate new machinery may be regarded as part of the process of making the machine ready for use. However, because this relationship is not reliably determinable, these costs should be expensed. In practice, there are many similar ambiguous areas where judgments must be applied. In these cases, it is not fruitful to attempt to specify how each should be treated. Whatever treatment the accountant decides to select, it should be applied consistently while considering materiality. Judgments about the necessity of costs are usually fairly obvious. However, there are costs that lie in the gray area between convenience and necessity. Some examples are: Arguments can be presented to support treating each of these gray-area costs as either necessary or unnecessary costs. Unless an official body undertakes the resolution of what constitutes necessity, practices will not be uniform. In such cases, accountants should apply judgment while considering the principles of consistency and materiality. In addition to identifying which costs are to be capitalized, accountants must determine the dollar amount to be recorded. There are five general acquisition situations that call for special consideration of their measurement problems:
Making the Asset Ready for Use
Necessity
Value Sacrificed
Determining/Recording the Cost of Operating Assets FAQs
Operating assets are resources used in the process of earning revenue. Examples of operating assets include cash, inventory, buildings, vehicles, equipment, and supplies.
The purpose of recording the cost of an operating asset is to assign the total cost to expense over the useful life of the asset. This helps determine how much Depreciation to charge each period until the value of the asset has been fully expensed.
Necessary costs are those required to make the asset ready for use, while unnecessary costs are not. Some examples of necessary costs include transportation and installation, while some examples of unnecessary costs include training personnel or remodeling facilities before installing equipment.
The purpose of recording the value sacrificed for an asset acquisition is to match revenues with expenses. In other words, it allows for a fair matching of each dollar that was exchanged during an asset exchange. In exchanges of dissimilar assets, the values are usually recorded at their respective historical carrying values.
In addition to identifying which costs are to be capitalized, accountants must determine the dollar amount to be recorded. There are five general acquisition situations that call for special consideration of their measurement problems: - Exchanges of dissimilar assets - Exchanges of similar operating assets - Creation or assumption of liabilities - Creation of stockholders’ equity - Receipt of donated assets
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
