Business

Depreciation Methods

A depreciation method is the systematic manner in which the cost of a tangible asset is expensed out to income statement. Popular depreciation methods include straight-line method, declining balance method, units of production method, sum of year digits method. For tax, MACRS is the relevant depreciation method.

Depreciation

Depreciation is the process through which the cost of a tangible asset i.e. property, plant and equipment is charged as an expense on income statement. Popular depreciation methods include straight-line method, declining balance method, units of production method and MACRS.

Held for Sale Assets

Held for sale assets are long -lived assets for which a company has a concrete plan to dispose of the asset by sale. They are carried on balance sheet at the lower of carrying value or fair value and no depreciation is charged on them.

Full Cost Method

Full cost method is a method of accounting for oil and gas exploration costs in which all exploration costs are capitalized when they are incurred, and none are expensed out.

Purchase of Fixed Assets

When a fixed asset is purchased, it is recognized as an asset on balance sheet by debiting the asset account and crediting cash or accounts payable or notes payable depending on whether it is a cash purchase, credit purchase or deferred payment.

Tangible Assets

Tangible assets are long-lived assets which have physical existence. They are also referred to as property, plant and equipment (PPE). They are capitalized on balance sheet and depreciated over their useful lives.

Basket Purchase

A basket purchase is a transaction in which multiple fixed assets are purchased together. If the cost can’t be assigned, it is allocated to the assets based on their appraised value.

Carrying Value

Carrying value of a fixed asset (also called book value) is the amount at which a fixed asset appears on a balance sheet. It equals the original cost or revalued amount of the asset minus accumulated depreciation and accumulated impairment loss, if any.

Recoverable Amount

Recoverable amount is the higher of fair value less costs to sell and value in use. The carrying value of a fixed asset is compared with recoverable amount to find out impairment loss, if any.

Exchange of Fixed Assets

When a company exchanges a fixed asset with another and the transaction has commercial substance, it records the asset acquired at its fair value or the fair value of assets given up, whichever is readily available.