Chapter 7 Notes

Chapter 7 Notes - Chapter 7 Notes Fixed assets (also called...

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Chapter 7 Notes Fixed assets (also called plant assets, or PPE) are long-lived assets that are tangible. For example, land, buildings, and equipments are all fixed assets. Cost principle directs a business to carry an asset on the balance sheet at the asset’s cost. Such cost includes: o The purchase price o Applicable taxes o Purchase commissions o All other amounts paid to acquire the asset and ready it for its intended use (maintenance) Capital expenditures (extraordinary repairs and additions) are recorded as an addition to the existing asset, which in turn will be expensed over its useful life Revenue expenditure (ordinary repairs and maintenance) are expensed in the accounting period in which expenditure occur Many companies have policies expensing all expenditures below a certain amount according to the materiality constraint With the exception of land, fixed assets are all gradually expensed (depreciate) over the course of their lives. This process is called depreciation. The cause of depreciation is physical wear and tear and obsolescence, it is NOT a process of market valuation Depreciation is based on the matching principle, as depreciation expense is recorded in the periods over the asset’s life Depreciation does not represent a fund of cash that business sets aside to replace assets as they wear out Accumulated depreciation is a contra-asset account. Its balance reflects the amount of the asset that has already been depreciated (expensed) Book Value of Asset= cost – accumulated depreciation No T-account for net A/R or Book Value
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Chapter 7 Notes - Chapter 7 Notes Fixed assets (also called...

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