chapter 10 accounting
a cost can be classified as a:
-fixed asset -an investment -an expense.
book value/net book value
Accumulated depreciation accounts are called contra accounts or contra asset accounts. This is because accumulated depreciation accounts are deducted from their related fixed asset accounts on the balance sheet. The difference between the fixed asset account and its related accumulated depreciation account is called the asset's book value or net book value of the asset.
two ways that deprecation is caused
Physical depreciation factors include wear and tear during use or from exposure to weather. •Functional depreciation factors include obsolescence and changes in customer needs that cause the asset to no longer provide services for which it was intended. For example, equipment may become obsolete due to changing technology.
three factors that determine the depreciation expense for a fixed asset are as follows:
assets intial cost(purchase price plus cost to obtain asset) expected useful life(estimated length of time that it will be used in normal operations) estimated residual life(estimated value of the asset at the end of its useful life.)
lease
contract for the use of an asset for a period of time. Leases are often used in business. For example, automobiles, computers, medical equipment, buildings, and airplanes are often leased.
depreciable cost.
difference between a fixed asset's initial cost and its residual value is called the asset's
investments
long-lived assets that are not used in the normal operations and are held for future resale. Such assets are reported on the balance sheet in a section entitled Investments. For example, undeveloped land acquired for future resale would be classified and reported as an investment, not land.
fixed assets
long-term or relatively permanent assets such as -equipment -machinery -buildings -land Such assets normally last more than a year and are used in the normal operations of the business. However, standby equipment for use during peak periods or when other equipment breaks down is still classified as a fixed asset, even though it is not used very often. In contrast, fixed assets that have been abandoned or are no longer used in operations are not classified as fixed assets.
Units-of-activity method
provides the same amount of depreciation expense for each unit of activity of the asset. Depending on the asset, the units of activity can be expressed in terms of hours, miles driven, or quantity produced. For example, the unit of activity for a truck is normally expressed in miles driven. For manufacturing assets, the units of activity are often expressed as units of product. In this case, the units-of-activity method may be called the units-of-production method or units-of-output method.
three depreciation methods used most often are as follows:
straight-line depreciation Units-of-activity depreciation Double-declining-balance depreciation
common misunderstandings about deprecation
•Depreciation does not measure a decline in the market value of a fixed asset. Instead, depreciation is an allocation of a fixed asset's cost to expense over the asset's useful life. Thus, the book value of a fixed asset (cost less accumulated depreciation) usually does not agree with the asset's market value. This is justified in accounting because a fixed asset is for use in a company's operations rather than for resale. •Depreciation does not provide cash to replace fixed assets as they wear out. This misunderstanding may occur because depreciation, unlike many expenses, does not represent an outlay of cash, but instead is an allocation of the asset's initial cost to expense.
The two parties to a lease contract are as follows:
•The lessor is the party who owns the asset. •The lessee is the party to whom the rights to use the asset are granted by the lessor
Fixed assets have the following characteristics:
•They exist physically and, thus, are tangible assets. •They are owned and used by the company in its normal operations. •They are not offered for sale as part of normal operations.