Read and take notes on sections 10.1-10.10 on pages 68-103.
This chapter introduces how organizations categorize and account for fixed assets. Assets are recorded at cost, not necessarily market value. It also covers the various methods of depreciation, why each method is used, and the "rate of return" expected by an organization when they purchase an asset.
- Section 10.2 identifies the accountant's role in managing plant assets.
- Section 10.3 explains how to classify assets using three key elements, and introduces the four steps of accounting for plant assets.
- Section 10.4 discusses the initial recording of plant assets. You should be able to explain fair market value, acquisition costs, historical costs, and which costs are capitalized. Review how to record the life history of a depreciable asset to ensure the proper account and true financial picture of an organization's assets. Pay attention to the difference in the cost and accounting for the construction of a new building versus buying land and assets for a specific lumped price. Be sure you know the difference between book value and appraised value.
- Section 10.5 discusses the reality that all assets with the exception of land have a useful life. A business should expect some wear and tear on assets as a direct result of using them to support business activity. Depreciation is an allocations process that ensures the useful life of an asset is properly identified from accounting and company valuation. There are three major causes of depreciation and four methods of depreciation.
- Section 10.6 distinguishes capital expenditures, revenue expenditures, and betterments. Each affects the assets value, its useful life, and financial statements. It can be difficult to account for additional costs incurred related to long-term assets.
- Section 10.7 discusses subsidy ledgers for plant assets and what happens to the accounting structure when a revenue expenditure is treated as a capital expenditure.
- Section 10.10 offers a self-test. The solution to the self-test is on pages 118-119.