Long-term assets generally benefit a business beyond one accounting cycle. The most common long-term assets are fixed assets, which are often referred to as plant assets or property, plant, and equipment. They are distinguished by their usage within normal business operations, their physical presence, and the fact that they are not held for sale within the business. Other categories of long-term assets include natural resources and intangible assets. Each of these classes of assets—fixed assets, natural resources, and intangible assets—utilizes a method to transfer their costs to an expense account over time through a method of depreciation, depletion, or amortization. These long-term assets are reported on the balance sheet at book value and have several disclosure requirements.
At A Glance
Fixed assets are tangible, long-lived assets used in the normal course of business. Fixed asset costs include all costs necessary to get the asset ready for its intended purpose or use.
- There are three major factors required to determine depreciation expense: initial cost, expected useful life, and residual value.
- There are several methods that can be used to depreciate a fixed asset. Three common methods include straight-line, units-of-activity, and double declining balance.
- Fixed assets may require maintenance or repairs. Ordinary maintenance and repair costs are expensed in the period they are incurred.
- The accounting treatment is specific for capital expenditures as they are capitalized and depreciated on financial statements.
- To properly discard or sell fixed assets, the asset must be removed from the accounting records. Gains and losses are recorded if the asset is sold above or below net book value.
- When natural resources are consumed, they are depleted. Depletion expense is computed by multiplying the depletion rate by the quantity extracted for the period.
- There are four common types of intangible assets: patents, copyrights, trademarks, and goodwill. Patents, copyrights, and trademarks are generally amortized over the life of the asset. Goodwill is not amortized.
Depreciation, depletion, and amortization are presented on both the balance sheet and the income statement. Additional information relative to long-term assets, fixed and intangible, should be included in the notes to the financial statements.