FIXED ASSETS AND INTANGIBLE ASSETS

Fixed assets: long-term, relatively permanent such as

equipment, machinery,
Buildings; and
land.
OTHER TITLES FOR FIXED ASSETS
plant assets or property, plant and equipment.
CHARACTERISTICS OF FIXED ASSETS
1) They are physical and, thus, are tangible assets.
2) They are owned and used by the company in its normal
operations.
3) They are not offered for sale as part of normal
operations.
4) They are of significant amounts to justify the recording
effort and cost
CLASSIFYING COSTS
A cost that has been incurred for a tangible asset not
normally for resale or sale, may be classified as a/an:
1) Expense,
2) Fixed asset, or
3) Investment
STEPS IN CLASSIFYING COSTS
Step 1. Is the purchased item (cost) of significant amount?
If no, the item is expensed
If yes, Proceed to Step 2
Step 2. Is the purchased item (cost) long-lived (more than
1 year)?
If no, the item is classified and recorded as an expense
If yes, the item is capltalized as an asset on the balance
sheet as either a fixed asset or an investment. Proceed to
Step 3
Step 3. Is the asset used in normal operations?
If yes, the asset is classified and recorded as a fixed
asset.
If no, the asset is classified and recorded as an
investment
.

THE COST OF FIXED ASSETS
The costs of acquiring fixed assets include all amounts
spent to get the asset in place and ready for use.
EXCLUSIONS FROM COST OF FIXED ASSETS
Unnecessary costs that do not increase the assets
usefulness are recorded as an expense. For example the
following costs are not capitalized but are expensed:
1) Vandalism
2) Mistakes in installation
3) Uninsured theft
4) Damage during unpacking and installation
5) Fines for not obtaining proper permits from
government agencies
FIXED COSTS ITEMS




CAPITAL VS REVENUE EXPENDITURES
Revenue Expenditure or Ordinary maintenance and
repair:
recorded as expense for the period; benefit only
the current period.
Capital Expenditure : Costs that:
1) improve the asset; or
2) extend its useful life.
CAPITAL EXPENDITURES
Asset Improvement: after a fixed asset in service, costs
incurred to improve the asset; recorded as increases to
the fixed asset account (Fixed asset account debited)
Extension of life/extraordinary repair: after a fixed asset in
service, costs incurred to extend the useful life. Such
costs are capital expenditures and are recorded as a
decrease in an accumulated depreciation account (Debit
to Accumulated depreciation)

DEPRECIATION
Fixed assets except land lose their ability, over time, to
provide services
Costs of fixed assets recorded as expense over the useful
lives
Depreciation: periodic recording of the cost as an expense
(adjustment)
CAUSES OF DEPRECIATION
Physical : wear and tear from use
Functional: obsolescence; change in customer needs
MISUNDERSTANDINGS ON DEPRECIATION
Depreciation not equal to decline in market value (can be
closely related but not the same); book value not the same
as market value
Depreciation does not provide cash to replace the asset
as they wear out; not a cash outlay (an adjustment for
which cash disbursed in the past)
FACTORS IN COMPUTING DEPRECIATION
1) Initial cost
2) Expected life (economic life)
3) Residual value