Accounting For And Presentation Of Property, Plant, Equipment, And Other Noncurrent Assets
Accounting for and Presentation of Property, Plant, Equipment, and Other Noncurrent Assets
Non-current assets include:
- Land - ground upon which the business buildings of an entity are located.
- Buildings - Buildings which appear in the property, plant, and equipment section of a Balance Sheet are quarters used to carry on business. Buildings owned as investments are not included as plant assets.
- Equipment – machinery used in manufacturing a product or performing a service for a customer.
- Intangible Assets – assets such as patents, leasehold, trademarks, goodwill.
- Natural resources – mines, quarries, oil reserves, gas deposits, and timber stands are examples of natural resources. They represent inventories of raw materials that will be consumed or exhausted through extraction or removal of their physical properties.
Depreciation in accounting is the spreading of the cost of a non-current asset over its estimated useful life to the entity.
Depreciation Expense refers to that portion of the cost of a long term asset recorded as an expense in an accounting period.
Accumulated Depreciation is a “contra asset” account. The balance in this account is the accumulated total of all of the depreciation expense recognized to date on the related asset.
Capitalize / Expense
- Capitalize – to capitalize an expenditure means to record the expenditure as an asset. A non-current asset that has been capitalized will be depreciated.
- Expense – to expense an expenditure means to record the expenditure as an expense. Expense items are not depreciated.
Net Book Value – the difference between an asset’s cost and its accumulated depreciation.
Depreciation of Non-current Assets
Depreciation is a non cash flow and therefore the recognition of depreciation expense does not affect cash.
Depreciation Expense Calculation Elements
- Asset Cost
- Estimated Salvage Value
- Estimated Useful Life to Entity
Alternative Calculation Methods for Depreciation
- Based on years of life Please use bullets when developing HTML
- Based on units of products
- Straight-Line Formulas:
- Depreciation Expense = (Cost – Estimated Salvage Value) / Estimated Useful life
- Depreciation Expense Per Unit = (Cost – Estimated Salvage Value) / Estimated total units
- Sum-of the-Years-Digits
Depreciation Method Alternatives
Accelerated depreciation results in greater depreciation expense during the early years of an asset’s life than straight-line depreciation. Most entity’s use straight line depreciation for financial reporting purposes.
Depreciation expense does not affect cash. However, because depreciation is deductible for income tax purposes, most entities use an accelerated method for calculating income tax depreciation.
The depreciation method selected for financial reporting will have an effect on Return on Investment (ROI) and Return on Equity (ROE). To make valid comparisons between companies, it is necessary to know whether or not comparable depreciation calculation methods have been used.
If an expenditure has been inappropriately capitalized or expensed, both assets and net income will be affected in the current year as well as future years of the asset’s life.
Assets Acquired by Capital Lease
A long-term lease is frequently a way of financing the acquisition of a non-current asset.
The effect of the accounting for a leased asset or a purchased asset should be the same.
The cost of a leased asset is the present value of the lease obligations.
Depreciation expense is recorded based on the present value cost.
As annual lease payments are made, interest expense is recognized and the lease obligation is reduced.
Intangible Assets and Natural Resources
The expenditure for these items is capitalized, and the expense is recognized periodically over the useful life of the asset to the entity.
The accounting is essentially the same as that for depreciable assets.
Intangible Asset Terminology
- Amortization Expense
- Usually an accumulated amortization account is not used.
Natural Resource Terminology
- Depletion Expense
- Accumulated Depletion
Present Value (PV) Analysis
Money has value over time
An amount to be received or paid in the future has value today (the present value) that is less than the future value due to the interest that can be earned between the present and the future.