Fixed assets

• long-term, relatively permanent held assets
• tangible resources (physical substance)
• used in operation of the business
• should last more than one year
• not held for sale - "productive assets"
• recorded at "cost"
• also called Property, Plant & Equipment; or Plant assets

depreciation

• process of allocating to expense of allocating to expense the cost of a fixed asset over its useful life
• systematic and rational -- to properly match expenses with revenues
• process of cost allocation NOT asset valuation
• "net book value" = cost - accumulated depreciation
• net book value does not represent market value

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depreciable assets

• land improvements, buildings, equipment, machinery, automobiles
• NOT land!
• wear and tear decreased revenue-producing ability of asset
• impact of obsolescence on revenue producing ability of asset

straight-line depreciation method
annual depreciation = cost - residual value/useful life

double-declining balance method

• accelerated depreciation method
• provides for a declining periodic expense over the expected useful life of the asset

what are the differences between the straight line and double declining balance method of depreciation?

• straight-line costs less residual value; depreciation expense is constant
• double-declining balance has declining book value, but not below residual value; depreciation expense is declining

tax considerations

• IRS allows depreciation expense deduction from income
• method chosen for taxes can be different from the method used in financial statements
• requires: straight-line, MACRS (Modified Accelerated Cost Recovery System)

partial year depreciation
depreciation is prorated based on the month the asset is placed in service

additional costs
incurred after a fixed asset has been purchased and placed into service

capital expenditures
extraordinary repairs and improvements; extends the useful life and/or adds service value to the asset; benefits multiple periods; relatively large dollar amount; infrequent and nonrecurring; added to the cost of the asset (improvement) or deducted from the balance in accumulated depreciation (extraordinary repair)

revenue expenditures
routine maintenance and repairs; primarily benefit the current period; relatively small in dollar amount; frequent and recurring; expensed in the current period

disposal of assets
sold, exchanged or retired

asset retirement
loss on retirement/disposal equals net book value