Long-Lived Assets, Depreciation and Disposal: every key term you need (+ practice quiz)
25 flashcard terms for Financial Accounting Topic 6, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
Tangible resources used in operations for more than one period rather than held for resale. Land, buildings, machinery and vehicles are reported at cost less accumulated depreciation.
Capitalization
Recording an expenditure as an asset because it provides benefit beyond the current period. Costs to acquire and to ready the asset for its intended use are included in the recorded amount.
Acquisition cost
Purchase price plus freight, insurance in transit, installation, testing and legal fees needed to place the asset in service. Ordinary repairs after use begins are excluded from this amount.
Basket purchase
Several assets bought for one lump sum. The price is split among them in proportion to their relative fair values, which matters because land is never depreciated while a building is.
Capital expenditure
Spending that extends useful life, raises capacity or improves output quality. It is added to the asset's carrying amount and therefore reaches the income statement gradually through depreciation.
Revenue expenditure
Routine maintenance and repairs that merely keep an asset in normal working order. It is expensed in the period incurred because it does not extend the benefit beyond the current use.
Depreciation
The systematic allocation of an asset's cost over the periods it serves. It is a cost allocation process rather than an attempt to measure a decline in market value or to set aside cash.
Useful life
The period the entity expects to use the asset, which may be shorter than its physical life because of obsolescence or planned replacement. It is an estimate, so it can be revised.
Residual value
The amount expected to be recovered at the end of the asset's useful life, net of disposal costs. It is subtracted from cost in most methods because it is not consumed by use.
Depreciable base
Cost less residual value, representing the portion of the asset that will actually be charged to expense. The declining-balance approach is the notable method that ignores it initially.
Straight-line depreciation
Depreciable base divided by useful life gives an equal charge each period. Best when benefits are consumed evenly, and it produces the smoothest reported earnings pattern of the common methods.
Declining-balance depreciation
A fixed rate is applied to the carrying amount each period, so charges start high and shrink. Residual value is ignored in the computation but caps how far the asset may be written down.
Double-declining balance
The accelerated variant using twice the straight-line rate. It suits assets that give most of their service early or that face heavy obsolescence, such as computing equipment.
Units-of-production depreciation
Depreciable base divided by expected total output gives a rate per unit, which is multiplied by actual usage. Charges track activity, so an idle machine records little or no expense.
Accumulated depreciation
The running total of depreciation recorded on an asset since acquisition. As a contra account it preserves original cost in the ledger while showing how much of it has been used up.
Book value
Cost less accumulated depreciation, the unexpired portion still to be allocated. It rarely equals market value, so a fully depreciated machine still in service carries only its residual amount.
Partial-year depreciation
When an asset is bought mid-period, only the months in service are charged. Some firms adopt a simplifying convention such as counting half a year in the year of purchase.
Change in accounting estimate
Revising useful life or residual value affects the current and future periods only. The remaining book value less the new residual is spread over the newly estimated remaining life.
Impairment
A write-down when an asset's carrying amount can no longer be recovered through its use or sale. The loss is recognized immediately, and reversal is prohibited under United States standards.
Intangible asset
An identifiable nonphysical resource such as a patent, licence or trademark. Purchased intangibles are capitalized, while most internally generated development costs are expensed as incurred.
Amortization
The allocation of an intangible asset's cost over its legal or useful life, whichever is shorter, normally on a straight-line pattern because usage patterns are hard to observe.
Indefinite-life intangible
An intangible with no foreseeable limit on the period of benefit, such as goodwill or certain renewable trademarks. It is not amortized but is tested for impairment at least annually.
Goodwill
The excess of the price paid for a business over the fair value of its identifiable net assets. It is recorded only in a purchase and can never be recognized for a firm's own reputation.
Depletion
The allocation of the cost of a natural resource such as a mine or timber tract, computed on a units extracted basis so the charge follows the physical removal of the resource.
Gain or loss on disposal
Proceeds less book value at the date of sale. A positive difference is a gain and a negative one a loss, and both appear in income rather than in operating revenue or cost of sales.