Definition In annuity method of assets depreciation, it is supposed that the money invested in the purchase of the asset earns interest at a fixed rate which is debited to the asset account and according to the annuity table, a certain fixed amount of depreciation is charged everywhere for the estimated useful life of the …
Learning Objectives: What are assets in accounting? Types of Assets Classification of Assets Definition properties, things and receivables having certain value owned by the business are called assets. Examples Following are some examples of assets. Cash, Debtors, Stock, Accounts Receivable, Prepaid Expenses, Land, Building, plant, Machinery, Motor Vehicles, Furniture, Fixture, Goodwill, Patents, Copy Rights, Trade …
Operating Assets – Definition The term operating assets is used to identify the broad category of long-lived assets that are used to produce goods or services. This group includes not only tangible assets (often known as property, plant, and equipment or fixed assets) but also those that exist only as intangible rights (such as trademarks, …
Below is the summary of accounting for asset exchange: Cost of new asset The recorded cost of the new asset cannot exceed the fair value of the new asset. Cash given Fair value of old asset plus cash. Lower of book value of old asset plus cash or fair value of old asset plus cash. …
Although some accountants believe exchanges of similar assets should be treated the same as exchanges of dissimilar ones, GAAP treat these transactions as being substantively different. That is, the exchange is viewed as a restructuring of the firm’s productive capacity rather than a disposal and acquisition. Consequently, GAAP prescribe a treatment for these exchanges that …
Exchange of similar nonmonetary operating assets Read More »
Definition & Explanation When an asset of one kind is exchanged for an asset of another kind, the preferred measurement of the new asset’s cost is the fair value of the asset given up. The simplest example of this type of exchange is a purchase for cash. The journal entry is straightforward as seen for …
While the term intangible could be used to describe all types of assets that lack physical form, it is used in accounting for dealing with certain operating assets. Accountants are not concerned with the lack of physical form of assets such as checking account balances, receivables, investments in securities, and prepaid expenses. Intangibles can be …
Definition Identifiable intangibles are assets that are derived from a specific right or ability. Most of them are created by registration with government authority or by contract. Types Some major types of identifiable intangible assets are listed below: Patent—unique right to manufacture a product or to use a process; protected by a legal authority for …
What are identifiable and unidentifiable intangible assets? Read More »
Most operating assets require expenditures to repair, maintain, or improve them. These subsequent costs can pose accounting problems if they are material in amount or significantly affect the asset’s service life. In general terms, the accountant faces the choice between capitalizing the expenditure by increasing the asset’s book value or expensing it in the year …
Definition and explanation Because almost every type of asset can be viewed as a set of components, there are few situations in which a single “asset” is acquired. In many (if not most) cases, this fact is ignored because the components are either permanently joined together, share the same useful life, or information about the …
A firm can acquire operating assets by giving the seller a promise to pay cash in the future and thus creating a liability. The cost of an asset acquired in this manner is equal to the present value of the future cash payments computed with an interest rate realistic for the circumstances. For example, if …
Acquisition of assets and creation or assumption of liabilities Read More »
Explanation A corporation may issue stock in exchange for an operating asset(tangible and intangible). There are two approaches for determining the cost of an asset obtained in this type of acquisition. The first approach uses the value given up by the firm to determine the cost of the asset. This amount constitutes the value foregone by …
On occasion, companies acquire assets without significant cost through the donation of land or buildings. For example, a local government unit may make the donation in order to influence the recipient to establish operations in the area and thereby contribute to the local economy. Two possibilities can be considered for determining the amount to debit …
Most accountants treated the acquisition of an asset and the obtaining of funds to pay for the acquisition as separate and unrelated events. GAAP departs from that convention only in terms of interest incurred while the asset is under construction and excludes interest incurred during its useful life. That is, interest incurred in preparing the …
Capitalization of interest cost during the construction of assets Read More »
Definition and explanation A manufacturing company may decide to construct an asset for its own use rather than purchase it from another source. Two financial accounting issues must be considered in dealing with this situation: (a) identification of cost and (b) treatment of costs in excess of the purchase price. In associating costs with the …
In determining how to account for an intangible asset, the first question to answer is whether there is sufficient proof that it actually exists. The primary evidence that should be sought is documentation of either legal protection or a contract. Secondary evidence is provided by cash inflows created by the asset. In this latter situation, …
Accounting for acquisitions of intangible assets Read More »
Explanation Goodwill is reported in financial statements only if its valuation can be supported by a transaction involving the purchase of a firm. However, the existence of this unidentifiable asset should not be ignored by the potential buyer or seller in negotiating the amount to be paid for the firm. Even though the estimated numbers …
The usefulness of most operating assets is consumed as they are applied to the production of goods or the providing of services. This consumption is known as either depreciation, depletion, or amortization, according to the type of asset that is being used. The actual processes of the consumption are dependent upon a number of factors, …
Accounting objectives for the use and disposal of operating assets Read More »
Explanation In making a determination of how much depreciation to assign to given periods, accountants should select a depreciation method that mirrors the pattern of the loss of the asset’s usefulness. The chosen method should allocate the asset’s cost “as equitably as possible to the periods during which services are obtained from [its] use.” The …
Explanation If it is economically feasible to keep records of the quantity of output produced from an asset, and if the results of using that information are materially different from those achieved under a time-related method, the firm might use the Units-of-output or units of production method to compute depreciation expense. The method first computes the average …
Definition and explanation The total amount of depreciation to be taken in an asset’s life is called its depreciable basis. The amount is the difference between the value of the asset at the beginning of its life (cost) and its estimated value at the end of its life (salvage value). The use of an estimated salvage …
Explanation By far the most easily understood and widely used depreciation method is straight-line, under which an equal amount of depreciation is assigned to each year in the asset’s service life. Under the straight-line method, the depreciable basis is divided by the number of years in the asset’s life in order to get the average …
Definition and explanation The sum of years’ digits method uses an arbitrary arithmetic system to derive the annual charges. This method is a kind of Accelerated depreciation methods. It involves multiplying the depreciable basis amount by an annual fraction. The denominator is the sum of the digits from one to n, where n is the …
Sum of years’ digits method of assets depreciation Read More »
Under the declining balance method, depreciation is charged on the book value of the asset, and the amount of depreciation goes on decreasing every year. Explanation As alternative systematic allocation schemes, several declining balance methods of computing depreciation expense have been developed. They determine the annual charge by multiplying a percentage rate by the book …
The fundamental concept of accounting for operating asset acquisitions calls for them to be recorded at their original cost. Three subconcepts guide practice: 1. The cost must be incurred in order to make the asset ready for use. 2. The cost must be necessary. 3. The cost is measured as the value sacrificed by the …
Determining/Recording the Cost of Operating Assets Read More »
Explanation Because operating assets are purchased and retired throughout the year, the firm faces the problem of determining how much depreciation expense to record for the part of the year that each acquired or retired asset is actually used. The basic principle holds that the company should adopt a convention for computing the partial year’s …
Because of the estimates and judgments involved in computing depreciation (as well as amortization and depletion), it is inevitable that facts in subsequent years will show that some of the original projections and assumptions were incorrect. Changes in service life If the originally selected service life of an asset turns out to be sufficiently incorrect …
Depreciation and changes in estimates and method Read More »
Explanation The effort of calculating depreciation expense for a large collection of assets often can be reduced without sacrificing a material amount of accuracy by aggregating the assets and treating them as if they are a single asset. The group approach to aggregation is applied to collections of assets that share similar service lives and …
Definition and explanation Amortization expense for intangible assets is based on the same concepts as depreciation. However, the process for selecting useful lives and allocation methods is more diffcult because of the inability to observe physical deterioration or obtain reliable market value estimates. The service life should not exceed the legal life (if any). A …
Definition and explanation The cost of natural resources extracted by a firm from property is known as depletion and is based on the same concepts as depreciation. Because the usefulness of the resources to the firm is generally directly proportional to the amount extracted (or otherwise removed), the output-oriented units of production approach is widely used …
Depreciation is based on the cost allocation concept because of the unreliability of interim measures of value. This use of an approximation causes several problems, four of which are discussed below. Actual life exceeds estimated life Because depreciation allocates the full amount of the depreciable base over an estimated life, it is fairly common to …
Operating assets and problems under cost allocation approach Read More »
Explanation When accounting for the disposal of operating assets, the firm should record a gain or loss for the difference between the net salvage proceeds and the asset’s book value as of the disposal date. It should be noted that any gain or loss from disposing of an asset is only an adjustment to income …
Insurance policies covering losses of property are an integral part of most firm’s risk management. Some understanding of the basic features of insurance is thus essential to the accountant’s education. This article focuses on the effect of minimum coverage clauses of casualty insurance. Generally, policies insuring against losses caused by such things as fire, theft, …