Long-lived assets: one whose future benefit is expected for a number of years; also called
. It includes such noncurrent assets as building, equipment, and
Under the cost principle: long-term assets are recorded at historical cost and depreciated
as the items age or the company uses up the value of the asset. This usage is recorded as
depreciation on the accounting ledgers; original long-term asset values are netted against
the total depreciation to determine the asset’s salvage value.
Income statement effect of errors in: An incorrect inventory balance causes an error in the
calculation of cost of goods sold and, therefore, an error in the calculation of gross profit
and net income. Left unchanged, the error has the opposite effect on cost of goods sold,
gross profit, and net income in the following accounting period because the first
accounting period's ending inventory is the second period's beginning inventory. The
total cost of goods sold, gross profit, and net income for the two periods will be correct,
but the allocation of these amounts between periods will be incorrect. Since financial
statement users depend upon accurate statements, care must be taken to ensure that the
inventory balance at the end of each accounting period is correct. The chart below
identifies the effect that an incorrect inventory balance has on the income statement.
Land purchased with a building on it
Tangible asset: Assets having a physical existence, such as cash, equipment, and real
estate; accounts receivable are also usually considered tangible assets for accounting
purposes. Opposite of intangible asset.
Intangible asset: Something of value that cannot be physically touched, such as a brand,
franchise, trademark, or patent. opposite of tangible asset.
Intellectual property asset: Any intangible asset that consists of human knowledge and
ideas. Some examples are patents, copyrights, trademarks and software. Most such assets
cannot be recongized on a balance sheet when internally generated, since it is very
difficult to objectively value intellectual property assets (slightly different rules apply in
the case of software). They can, however, be included in a balance sheet if acquired,
which allows a more accurate valuation for the asset (that is, the acquisition cost).
Patent: The exclusive right, granted by the government, to make use of an invention or
process for a specific period of time, usually 14 years.
Copyright: The exclusive right to make and dispose of copies of a literary, musical, or
Franchise: A form of business organization in which a firm which already has a
successful product or service (the franchisor) enters into a continuing contractual
relationship with other businesses (franchisees) operating under the franchisor's trade
name and usually with the franchisor's guidance, in exchange for a fee.