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Unformatted text preview: Set the Stage for Chapter 6 So far, you have learned that assets are something the company OWNS. In Chapter 2, you saw how some of those assets converted to expenses or revenues. For example, when a company prepays rent, the payment is initially considered an asset (Prepaid Rent). Then, as each month progresses, the amount of Prepaid Rent decreases as Rent Expense is recorded until there is no more Prepaid Rent remaining. What about assets that are used over several years things like machinery, vehicles, and buildings? In this chapter, youll learn about the concept of depreciation. You already know that your car or truck was worth more when it was new than it is worth now that you have driven it for some number of miles. Each time you drive your car or truck, you use up some portion of it. Depreciation is associated with assets that are used for longer than a 12-month period and it serves to match the amount of these assets that are used up to generate revenue (that matching concept again!). This chapter first helps define the difference between current assets and long-term assets. Current assets are those that will most likely be converted to cash or used up within a 12-month period. For example, Accounts Receivable is most likely to convert to cash (meaning customers will pay the amounts they owe) within the next 12 months. Merchandise Inventory will most likely be sold (meaning converted to cash or used up) and Prepaid Items will generally be used up within the upcoming 12-month period. Long-term assets are those that will benefit several accounting years. This chapter defines the difference between long-term tangible assets, natural assets, and intangible assets. Depreciation is associated with tangible assets (typically called Property, Plant, and Equipment or PPE), depletion is associated with natural assets (mineral reserves, forests, etc), and amortization is associated with some intangible assets (patents, software, etc.). The methods of accounting for depreciation, depletion, and amortization are the same its just the account names that differ and relate to different types of assets. Notice that land is not included in any of the examples above. While land is a long-term tangible asset, it is always held at purchase price and is never depreciated. That rationale is that land is not used up to generate revenue. Land will continue to survive, even if minerals are extracted or forests are depleted. It will continue to survive even after equipment and buildings are removed.It will continue to survive even after equipment and buildings are removed....
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