Accounting Paper

When one is setting up and maintaining a business, a large investment in property, plant and equipment is often required. These assets are often referred to as fixed assets or capital assets. There are two types of assets included in the cost of basis in long lived assets. The first is real property. Real property consists of land, land improvements (such as sidewalks and parking lots), building, and other structures attached to the land. The second type of asset is tangible personal property. An important thing to remember when determining tangible personal property is that the term personal means that the property has a physical substance and is something other than real estate. Personal property must be owned by the business not by the individual owners. This includes machinery, equipment, furniture, and fixtures that can be removed and used elsewhere. The property, plant, and equipment classification doesn't include assets purchased for investment reasons. These assets are classified as other assets or investments.

When recording assets, you first determine which assets should be classified in as a capitalized cost. Capitalized costs are all costs recorded as part of the asset's cost. The cost of equipment, other tangible property, land and building, and other assets constructed by or for the business is all part of the capitalized assets.

Some asset's such as property, plant, and equipment depreciate because they have limited life, unlike land, these assets will get used up or deteriorate over time. Depreciation is the allocation of the cost of an asset over the asset's useful life. Depreciation does not refer to a decrease in the market value of the asset. To determine the annual depreciation of an asset you need the cost of the asset its estimated salvage value and estimated useful life. The methods used to determine depreciation are the straight line method, declining balance method, the double declining balance method, and the sum of the years digits method the straight line method is the most widely used method of computing depreciation expense for financial statement purposes. In this method an equal amount of depreciation is recorded for each period of the asset's useful life. Under the declining balance method of depreciation, the book value of an asset at the beginning of the year is multiplied by a percentage to determine the depreciation for the year. The double declining balance method uses a rate equal to twice the straight line method and applies the rate to the book value of the asset at the beginning of the year. The sum of the years' digits method is determined when you take a fractional part of the asset cost and charge it to the expenses each year. The denominator of the fraction is always the sum of the years' digit and the numerator is the number of years remaining in the useful life of the asset. This fraction is multiplied by the acquisition cost minus the net salvage value of the asset.

When choosing the appropriate method of an asset you must consider the matching principle. The goal is to match the cost of the asset to the periods when the asset provides benefits to the business. If you compare methods you will notice that in the early years the sum of the years' digits and the double