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Principles of Accounting, Volume 1: Financial Accounting

Summary

Principles of Accounting, Volume 1: Financial AccountingSummary

Summary

11.1 Distinguish between Tangible and Intangible Assets

  • Tangible assets are assets that have physical substance.
  • Long-term tangible assets are assets used in the normal course of operation of businesses that last for more than one year and are not intended to be resold.
  • Examples of long-term tangible assets are land, building, and machinery.
  • Intangible assets lack physical substance but often have value and legal rights and protections, and therefore are still assets to the firm.
  • Examples of intangible assets are patents, trademarks, copyrights, and goodwill.

11.2 Analyze and Classify Capitalized Costs versus Expenses

  • Costs incurred to purchase an asset that will be used in the day-to-day operations of the business will be capitalized and then depreciated over the useful life of that asset.
  • Costs incurred to purchase an asset that will not be used in the day-to-day operations, but was purchased for investment purposes, will be considered an investment asset.
  • Investments are short term (can be converted to cash in one year) or long term (held for over a year).
  • Costs incurred during the life of the asset are expensed right away if they do not extend the useful life of that asset or are capitalized if they extend the asset’s useful life.

11.3 Explain and Apply Depreciation Methods to Allocate Capitalized Costs

  • Fixed assets are recorded at the historical (initial) cost, including any costs to acquire the asset and get it ready for use.
  • Depreciation is the process of allocating the cost of using a long-term asset over its anticipated economic (useful) life. To determine depreciation, one needs the fixed asset’s historical cost, salvage value, and useful life (in years or units).
  • There are three main methods to calculate depreciation: the straight-line method, units-of-production method, and double-declining-balance method.
  • Natural resources are tangible assets occurring in nature that a company owns, which are consumed when used. Natural resources are depleted over the life of the asset, using a units-consumed method.
  • Intangible assets are amortized over the life of the asset. Amortization is different from depreciation as there is typically no salvage value, the straight-line method is typically used, and no accumulated amortization account is required.

11.4 Describe Accounting for Intangible Assets and Record Related Transactions

  • Intangible assets are expensed using amortization. This is similar to depreciation but is credited to the intangible asset rather than to a contra account.
  • Finite intangible assets are typically amortized using the straight-line method over the useful life of the asset.
  • Intangible assets with an indefinite life are not amortized but are assessed yearly for impairment.

11.5 Describe Some Special Issues in Accounting for Long-Term Assets

  • Because estimates are used to calculate depreciation of fixed assets, sometimes adjustments may need to be made to the asset’s useful life or to its salvage value.
  • To make these adjustments, the asset’s net book value is updated, and then the adjustments are made for the remaining years.
  • Assets are sometimes sold before the end of their useful life. These sales can result in a gain, a loss, or neither, depending on the cash received and the asset’s net book value.
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