Basics of Accounting Assets

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Basics of Accounting Assets

Assets, as defined by the Financial Accounting Standards Board Concepts Statement 6, are probable
future economic benefits obtained or controlled by a particular entity as a result of past transactions or
events. Essentially, assets are things you own, have value, and will yield something good in the long
run.
To illustrate the assets of an entity, liabilities and equities have to be involved. Liabilities are what the
entity had to settle or pay (e.g. wages, long-term debt, accounts payable, etc.) while equities describe
the owners shares in the companys assets. One can have a picture of the entitys overall assets by
adding the liabilities with the equities. In mathematical equation,
Assets = Liabilities + Equities

Classification of Assets
Generally, assets are categorized depending on their convertibility, physical existence, and usage. If
classified based on convertibility or the ability to be converted into cash easily, assets can either be
current or fixed.

Current assets or liquid assets normally have a briefer lifespan in comparison to fixed assets.
Examples are stocks, inventories, fixed deposits, and short-term investments.

Fixed assets, sometimes referred as long-term assets and non-current assets, are assets that
necessitate time and processes or transactions for them to be converted into cash. Typical examples
include buildings, land, equipment, and furniture.
Assets can also be classified as tangible or intangible, and this is based on their physical existence.
Tangible assets are assets that can be felt or touched while those that cannot are called intangible
assets. Fixed assets are good examples of tangible assets. Patents, copyrights, and trademark are
common intangible assets.
Moreover, assets can be grouped depending on their utilization in the business day-to-day
undertakings. Operating assets, which include cash, stocks, and machinery, are assets that are needed
for the daily business operations. Non-operating assets like patents may seem to be not of immediate
use, but are necessary for the enterprise and the business outlook.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

Basics of Accounting Assets

Accounting Your Fixed Assets

Fixed assets are reported on the balance sheet of an entity. Generally, accounting for these assets is
associated with recording the acquisition cost, depreciation cost, consequent expenses on the asset,
and assets disposal.

Acquisition Cost
On the balance sheet, the acquisition cost or the book value pertains to the expenses related to
bringing in new clients. It includes expenditures that are typical, sensible, and are paramount in
obtaining and in setting the properties. The acquisition cost also covers the costs for repairing and/or
maintaining the properties, but not the conveyance or shipment costs. In computing for the acquisition
cost, one can use this formula:
Acquisition Cost = (Added Direct Expenses Affecting to Acquisition + Buying Price) (Amortization +
Impairment Costs + Depreciation + Taxes)
With this equation, it can be observed that the acquisition cost consists of the actual price paid for the
asset and direct costs used in putting the asset to work.

Land, Buildings, Equipment, and Improvements

In accounting for the fixed assets, business owners should also consider the expenses incurred for the
land, building, equipment, and improvements. The land in the balance sheet refers to where the
business is situated. It can be the companys main office, its parking space, or the space used for its
warehouse. In valuing the land, historical cost is used. To illustrate this, lets say that a piece of land is
purchased in 2010 for $40,000. As time progresses, the value of the land increases. Probably in 2015,
its value is somewhat between $50,000 - $60,000. However, the monetary worth of the land stated on
the balance sheet will be at its historical cost, which is $40,000.
Similar to land, buildings such as office buildings and warehouses are valued at their historical cost.
Maintaining the buildings translates to maintenance costs, and they are reported on the income
statement. Buildings undergo depreciation; land does not. On the balance sheet, if the historical cost of
the building is at $100,000 and the depreciation is at $30,000, the propertys net book value is $70,000.
Equipment and buildings are alike in the manner that both accumulate depreciation and are valued at
their historical cost. Furthermore, improvements made on the property or assets are reported in the
balance sheet.
15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

Basics of Accounting Assets

Depreciation
Depreciation gauges the manner by which an assets value diminishes. It describes the slow but
progressive exhaustion of an assets serviceability mainly due to use, wear, desuetude, or inadequacy.
As mentioned earlier, depreciation is not applicable to assets whose values do not drop over time, like
land. For business owners to determine how the asset can be depreciated, the estimated useful life, its
estimated salvage value, cost, and depreciation method must be accounted for.
It is ideal that business owners evaluate and determine the estimated useful life of every asset of an
entity. Generally, the useful life is specified in unit of time such as years and months or per unit
produced by the equipment or machinery. The estimated salvage value or the residual value is the
amount or worth that the entity will earn after the asset has been sold.
For the methods employed in calculating the depreciation, the common techniques used are straightline, units-of-production, double-declining, and sum-of-years digit. The countrys existing tax
depreciation system being employed is the Modified Accelerated Cost Recovery System (MACRS).
Under this approach, a tangible assets capitalized cost is reclaimed via annual abatement for
depreciation over certain lives, as established by the Internal Revenue Services (IRS) Tax Code.

Consequent Expenses on the Asset

Usually, enterprises spend their resources in maintaining or improving a certain or group of assets. This
way, the assets become of higher value. In addition, expenses are made for the asset in order to further
or prolong its useful life. With this, the accumulated depreciation drops.

Assets Disposal
In disposing of an asset, entities must make sure that the depreciation account of a property or an
asset is current. According to boundless.com, the asset balance and the accumulated depreciation
balance should then be written off while whatever money or property that is gained and correspond to
the disposed assets must be reported. In the end, all benefits and losses incurred during the entire
process should also be recorded.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com