Accounting Chapter 9

A plant asset

.Is an asset with a useful life of more than one year that is used in producing revenues in a business's operations. Examples of plant assets include land, land improvements, buildings, machinery and equipment, office equipment, furniture, fixtures, vehicles, leasehold improvements, and construction work-in-progress. Plant assets are also referred to as fixed assets and/or property, plant and equipment. .They are recorded at cost and depreciation is reported during their useful lives. (However, there is no depreciation of land, and the depreciation for construction work-in-progress begins when the asset is placed into service.) The cumulative amount of depreciation is reported in the contra plant asset account Accumulated Depreciation. .The related accumulated depreciation are reported on a company's balance sheet in the non-current asset section entitled property, plant and equipment. Accounting rules also require that the plant assets be reviewed for possible impairment losses.

What is depreciation

.Is the assigning or allocating of a plant asset's cost to expense over the accounting periods that the asset is likely to be used. For example, if a business purchases a delivery truck with a cost of $100,000 and it is expected to be used for 5 years, the business might have depreciation expense of $20,000 in each of the five years. (The amounts can vary depending on the method and assumptions.) .In our example, each year there will be an adjusting entry with a debit to Depreciation Expense for $20,000 and a credit to Accumulated Depreciation for $20,000. Since the adjusting entries do not involve cash, depreciation expense is referred to as a non-cash expense.

The accounting entry made when disposing a plant asset

Accumulated Depreciation—Equipment

The cost principle

.Is one of the basic underlying guidelines in accounting. It is also known as the historical cost principle. .It requires that assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired. For example, if equipment is acquired for the cash amount of $50,000, the equipment will be recorded at $50,000. If the equipment will be useful for 10 years with no salvage value, the straight-line depreciation expense will be $5,000 per year (cost of $50,000 divided by 10 years). The equipment's market value, replacement cost or inflation-adjusted cost will not affect the annual depreciation expense of $5,000. The company's balance sheets will report the equipment's historical cost minus the accumulated depreciation.

Salvage value

Is an estimate of the assets value at the end of its useful life.

Useful life

Is an estimate of the expected productive life, also called service life, of the asset for its owner. May be expressed in time, units of activity or units of output.

The asset turnover ratio

Net sales / Average Total Assets -------------------------/= Asset turnover

Depletion of natural resources

Total cost minus salvage value / Total estimated units ----------------------------/= Depletion cost per unit | Depletion cost per unit * Number of units extracted and sold ---------------------------------------/= Annual depletion expense .Example $5,000,000/10,000,000 units = $.50 depletion cost | $.50 * 800,000 extracted units and sold = $400,000 annual depletion expense

Cost

make it ready for use, explains itself.