The first step in accounting for purchases of property, plant, and equipment is to debit the asset account for the purchase price. Next, allocate a portion of the purchase price to depreciation expense at the end of each accounting period during the asset's useful life. Additional capital expenditures related to the asset are also recorded during the asset's useful life. Finally, a journal entry is required when an asset is sold, retired, or scrapped.
Practice calculating depreciation expense for property, plant, or equipment and the related journal entry.
For help with recording depreciation expense, read Depreciation of Plant Assets on pages 77-89.
Due to the historical cost concept of accounting, assets are recorded at their purchase price and depreciated during their useful lives.
The book value of an asset is calculated as the purchase price minus accumulated depreciation. Accumulated depreciation represents all the depreciation that has been expensed to date. At the end of an asset's useful life, book value will equal its salvage value or zero.
What type of account is accumulated depreciation?
The accounting treatment of property, plant, and equipment is explained in detail in Initial Recording of Plant Assets on pages 71-76.
The accounting treatment for tangible assets is different than the accounting treatment for intangible assets. Tangible assets tend to be depreciated whereas intangible assets are either amortized or checked periodically for impairment.
What is the accounting treatment for leasehold improvements? Are they amortized, capitalized, or expensed?
The accounting treatment of intangible assets is explained in detail in Intangible Assets on pages 138-147.
Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.