Capitalizing Costs and Depreciation

Flashcards covering key concepts related to capitalizing costs and depreciation practices in accounting.

Capitalization

The accounting process of recording a cost as a long-term asset instead of an expense.

Fixed Asset

A long-term asset used in the operation of a business, typically lasting more than one year.

Necessary Costs

Costs that are essential to bringing an asset into use or operation.

Depreciation

The allocation of the cost of a tangible asset over its useful life.

Residual Value

The estimated amount that an asset is worth at the end of its useful life.

Straight-Line Depreciation

A method where the same amount of depreciation is recorded each year over the useful life of the asset.

Double Declining Balance Method

An accelerated depreciation method that doubles the straight-line rate.

Cost of land

Includes the purchase price, costs of clearing, grading, and any necessary site improvements.

Mid-Month Convention

Depreciation method where purchases made before the 15th count as a full month and those after count as a half month.

Capital Expenditure

An expense that results in the acquisition or improvement of a long-term asset.

Revenue Expenditure

An expense that does not improve or prolong the life of a fixed asset, usually related to repairs or maintenance.

Improvements vs. Repairs

Improvements are capitalized, while repairs are typically expensed.

Construction in Progress

A type of accounting classification for assets under construction that are not yet ready for use.

Contra Asset Account

An account that reduces the value of an asset on the balance sheet, such as accumulated depreciation.

GAAP

Generally Accepted Accounting Principles, the framework of accounting standards used for financial reporting.

Makers Depreciation

A method defined by the IRS for depreciating certain types of assets.

Utilization Rate

The proportion of time an asset is used against its total available time.

Inventory vs. Fixed Asset

Inventory is held for sale or production, while fixed assets are used in business operations.

Tax Purposes

The rules set by the IRS for the depreciation and accounting of assets for tax reporting.