What Is a Long-Term Asset?

Long-term assets are asset items in a company's assets that are not exclusively used for business purposes and have a long economic life. In enterprises in Western countries, long-term assets usually include the following: (1) real estate, houses and equipment (also called plant equipment), including houses, land, machinery, tools and equipment, appliances and their installations, cargo equipment, etc. (2) Natural resources, such as forests, oil wells, mines, etc .; (3) Intangible assets are specific rights owned by enterprises that can bring economic benefits to the enterprise without physical form, such as patent rights, trademark rights, copyrights, enterprises Credibility etc. Long-term assets are generally reflected at their original value in each asset account. Except for land that is not depreciated, depreciation should be withdrawn on time for plant and equipment; natural resources such as mines should be depreciated every period; intangible assets such as patent rights should be amortized every period. In the company's balance sheet, long-term assets are generally not included in long-term investment, usually a separate item, while intangible assets should reflect their original value and current net value, respectively. ^[1]

Long-term assets

Long-term assets include long-term investments,

The cost of a long-term asset includes all reasonable and necessary expenses to acquire the asset in place and reach a usable state. Therefore, the cost of long-term assets may include many additional costs. For example, these additional costs include

In addition to land, tangible long-term assets have only a certain useful life value to the company. In accounting, depreciation is the allocation of the cost of a tangible long-term asset to the expenses of each period during the period in which the asset provides services. In short, the basic purpose of depreciation is to achieve the matching principlethat is, to deduct the cost of goods or services to realize the benefit from the revenue of a fiscal year.

Earlier in this chapter, we considered the transport truck asset as a series of transportation services that the truck received while it was being held and in use. The cost of this truck was initially credited to the asset account, as the purchase of these transportation services would benefit several future fiscal years. However, as these services are consumed, the cost of the truck is also gradually removed from the balance sheet through depreciation and entered into the expense account.

Dismantling of old accounts

The accounting entries that record depreciation include debit depreciation expense accounts and credit accumulated depreciation accounts. The creditor of the entry will eliminate the cost of the portion of assets it expects to consume in the year from the balance sheet. The debiter of the entry allocates the used cost portion to the expense account.

Different depreciable assets, such as factory buildings, transportation vehicles, and office equipment, have separate depreciation fees and accumulated depreciation accounts. These separate accounts help accountants to independently calculate the costs of different corporate actions, such as production, sales, and management.

The fixed assets in the balance sheet are listed at the net book value (actual value). The net book value of a fixed asset is its cost price less the corresponding accumulated depreciation. Cumulative depreciation is an asset hedging account that represents the portion of the cost of the asset that has been allocated to the expense account. Therefore, the net book value represents the portion of the cost of the asset that will be allocated to the expense account in future fiscal years.

Method of calculating depreciation

Different companies can choose different depreciation methods. GAAP only stipulates that the depreciation method used must allocate costs reasonably and systematically over the useful life of the asset.

The straight-line depreciation method allocates equal depreciation expenses to each year within the useful life of the asset. Other depreciation methods are mostly accelerated depreciation methods. "The term accelerated depreciation means that a larger depreciation amount is recognized early in the useful life of the asset and a decreasing depreciation amount is recognized in subsequent years. However, the depreciation recognized by the straight-line depreciation method and the accelerated depreciation method over the entire useful life of the asset. The total is the same.

In this chapter. We will demonstrate and explain the straight-line depreciation method and the most commonly used accelerated depreciation method, the double declining balance method. An example of depreciation is the purchase of a new delivery truck by BJ Company based on the following data. The data and assumptions needed to calculate the annual depreciation are as follows:

Cost 17 000

Expected Residual Value 2 000

Expected useful life 5 years

(1) Linear depreciation method. Under the straight-line depreciation method, the annual depreciation amount is calculated by subtracting the depreciable amount of the estimated residual value from the cost of the asset and dividing it by the estimated useful life. The data in the use case, the straight-line depreciation method for the next year's depreciation rate is calculated as follows:

(CostEstimated residual value) / Estimated useful life = (US $ 17,000-US $ 2,000) / 5 years = US $ 3,000 / year

In practice, if the amount of residual value is not expected to be large, it is usually ignored. Generally, buildings, office equipment, furniture, furnishings, and special-purpose equipment are generally considered to have few residual values. In contrast, assets such as vehicles, aircraft, and computer systems are often considered to have large residual values.

It is usually convenient to list the portion of an asset that can be written off each year as a fixed proportion of the depreciable amount of the asset. This proportion is called the depreciation rate. When the straight-line depreciation method is used, the depreciation rate can be simply obtained by dividing 1 by the asset life. The transport truck in our example has a 5 year expected useful life so the annual depreciation fee is 1/5 of the available depreciation amount, or 20%. Similarly, the depreciation rate of an asset with a life of 10 years is 1/10, or the depreciation rate of an asset with a life of 8 years is 1/8, or 12.5%.

When assets are bought in the middle of an accounting period, it is not necessary to accurately calculate depreciation to the nearest day or week. One of the most widely used methods for calculating off-year depreciation is to make the calculation accurate to the month.

(2) Double declining balance method. The most widely used accelerated depreciation method is called the double declining balance method. When the double declining balance method is used, the accelerated depreciation rate is calculated as a certain percentage of the straight line depreciation rate. The annual depreciation fee is calculated by multiplying this accelerated depreciation rate by the cost to be depreciated (that is, the net book value at that time). The calculation is demonstrated as follows:

Depreciation expense = accelerated depreciation rate of remaining net book value

3. Differences in different depreciation methods

Using the straight-line depreciation method results in companies reporting higher profits than using the accelerated depreciation method. But is the company more profitable when using straight-line depreciation than when using accelerated depreciation? The answer is of course no. Depreciationregardless of how it is calculatedis just an estimate. This estimated amount has no effect on the true financial status of the company.

Therefore, companies using the accelerated depreciation method in their financial statements are only a bit more conservative in calculating net income than those using the straight-line depreciation method. However, the benefits of using accelerated depreciation on income taxes are real. Accelerated depreciation method increases the depreciation charge more than straight line depreciation method. This reduces reported net income. Therefore it at least delays the payment of taxes.

Although companies can choose different depreciation methods, they must all conform to the principle of consistency. This principle means that the company cannot change the depreciation method at will when calculating the annual depreciation fee of any long-term asset. However, the company management has the right to choose different depreciation methods to calculate the depreciation of different assets.