Overview

This topic explains how to account for long-term assets such as equipment, buildings, and intangible assets. It also covers methods of calculating and recording depreciation, amortization, and depletion, and their effects on financial statements.

Key Concepts and Methods

• Long-Term Assets: Assets used in operations for more than one year (e.g., land, buildings, equipment).
• Capital Expenditures: Costs added to the asset account because they extend the asset’s life or usefulness.
• Depreciation: Allocation of the cost of tangible fixed assets over their useful lives.
• Common Depreciation Methods:
  • Straight-Line: (Cost - Salvage Value) / Useful Life
  • Declining Balance: Accelerated method based on a fixed rate
  • Units-of-Production: Based on actual usage
• Amortization: Spread cost of intangible assets (e.g., patents) over useful life.
• Depletion: Used for natural resources such as oil or minerals.
• Disposal of Assets: Remove asset and related accumulated depreciation; record gain or loss.
• Book Value: Asset Cost - Accumulated Depreciation

Step-by-Step Example

Problem: A company buys equipment for $50,000. It has a salvage value of $5,000 and a useful life of 5 years. What is the annual depreciation using the straight-line method?

Step 1: Apply the formula:
($50,000 - $5,000) / 5 = $9,000 per year

Answer: Annual Depreciation = $9,000

Quick Tip