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 owner’s shares in the company’s assets. One can have a picture of the entity’s 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.
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 asset’s disposal.
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 company’s main office, its parking space, or the space used for its warehouse. In valuing the land, historical cost is used. To illustrate this, let’s 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 property’s 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.
Depreciation gauges the manner by which an asset’s value diminishes. It describes the slow but progressive exhaustion of an asset’s 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 straight-line, units-of-production, double-declining, and sum-of-years digit. The country’s existing tax depreciation system being employed is the Modified Accelerated Cost Recovery System (MACRS). Under this approach, a tangible asset’s capitalized cost is reclaimed via annual abatement for depreciation over certain lives, as established by the Internal Revenue Service’s (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.
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.