Accounting Principles I – Operating Assets - Quick Guides

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Study GuideAccounting Principles I–Operating Assets1. Operating Assets Defined1.What are operating assets?Operating assetsarelong-term assetsa company uses to run its everydaybusiness.They arenotitems the company plans to sell to customers (like inventory).These assets are important because they help the businessproduce products,provide services, and earn revenue over many years.2. The 3 Main Types of Operating Assets1) Property,Plant, and Equipment (PP&E)This category includes physical assets a company uses in operations. These aresometimes calledplant assetsorfixed assets.Examples include:•Land•Land improvements(things added to land that wear out over time), such as:○driveways○parking lots○fencesThese itemsneed repairs and replacementover time.

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Study Guide•Buildings•Equipment•Vehicles•Furniture2) Natural Resources (Wasting Assets)Natural resourcesare assets created by nature over very long periods of time—sometimesthousands or even millions of years.Examples include:•timber•fossil fuels•mineral depositsCompanies use natural resources bycutting them down or extracting them,meaning the supply gets used up.That’s why natural resources are often calledwasting assets.3) Intangible AssetsIntangible assetsare valuable assets thatdo not have physical form, but theycan still be extremely important to a company.Examples include:•Patents•Copyrights•Trademarks

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Study GuideEven though you can’t touch them, they can help a business earn money and staycompetitive.3. Matching Costs with Revenue (Matching Principle)Businesses follow thematching principle, which means:The cost of an asset should be recorded as an expense over the years it helps thecompany earn revenue.Since most operating assets last a long time, their costs are spread out over theiruseful livesinstead of being expensed all at once.4. How the Cost is Spread Out Over TimeDifferent asset types use different expense terms:Depreciation (for plant assets)Used forproperty, plant, and equipment(like buildings and equipment).Depletion (for natural resources)Used when the companyuses upnatural resources (like mining minerals or drillingoil).Amortization (for intangible assets)Used forintangible assets(like patents and trademarks).5. Why Land Is SpecialLand is never depreciated.

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Study GuideThat’s because land is considered to have anunlimited useful life, meaning it doesnot “wear out” the same way buildings or equipment do.6. Where These Appear on the Balance Sheet•Natural resourcesare usually listedwithin the Property, Plant, andEquipment (PP&E)section.•Intangible assetsare shown in theirown separatecategoryon the balancesheet.2. The Cost of Property, Plant, and Equipment (PP&E)When a business buysproperty, plant, and equipment (PP&E), the totalcostismore than just the sticker price.PP&E cost includes:thepurchase priceplusevery cost needed to get the assetready for its intended useIn other words, if the asset is not usable yet, any reasonable spending to make itusable becomes part of the asset’s cost.1) Cost of LandBuying land usually comes with extra fees beyond the price of the land itself.Costs included in the cost of land:•real estate commissions•legal fees•bank fees

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Study Guide•title search fees•similar closing costsAlso, land often needs work before it can be used.Land preparation costs include:•clearing trees•draining and filling land•grading (removing small hills and filling dips)•landscapingWhat about tearing down an old building?If there is an old building on the land and it must be removed,demolition costs areadded to the cost of the land.Example:A company buys land for$100,000, pays$3,000in closing costs, and pays$22,000to demolish an old warehouse.So, the recorded cost of land is:$100,000 + $3,000 + $22,000 = $125,0002) Cost of Land ImprovementsLand improvementsare things added to land that make it more useful, like aparking lot.Land improvements cost includes:

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Study GuideAll spending needed to make theimprovement ready to use.•If a company hires another business to build a parking lot, the cost is simplythecontract price.•If a company builds its own parking lot, the cost includes:○materials used○employee wages for constructionSo, whether the company builds it or pays someone else, the goal is the same:record the total cost needed to create the improvement.3) Cost of BuildingsThe cost of a building includes the amount paid for the building and the extra costsrequired toofficially obtain it and make it usable.Building cost includes:•purchase price•closing costs•back taxes owed(if the buyer pays them)•remodeling needed to prepare the building for use•repairs necessary for it to be usedIf the companyconstructs a building over time…Sometimes a building is built over a long period, and the company borrows money tofinance it.Important rule about interest:•Interestduring constructionis included in the building’s cost

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Study Guide•Interestafter construction is completeis recorded asinterest expenseSo once the building is ready for productive use, future interest is not added to thebuilding anymore.4) Cost of Equipment, Vehicles, and FurnitureFor items like equipment and vehicles, companies include all costs needed to get theitemdelivered, installed, and ready to operate.Cost includes:•purchase price•sales taxes•transportation fees•insurance paid during shipping•assembly•installation•any other costs needed to prepare the item for useCosts NOT included:Some costs may happen at the same time as a purchase, but they are notconsidered part of the asset cost.For example,motor vehicle licensing and insurancearenot included, even ifpaid when the vehicle is bought.Why?Because these arenormal, recurring operating expensesand they donot addlasting valueto the vehicle.

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Study Guide3. Depreciation of Operating AssetsKey Definitions•Useful life: The estimated productive life of an asset (in years or in units suchas miles, hours, items produced).•Salvage value: The amount the company expects to receive when the assetis sold/exchanged at the end of its useful life.1) Straight-Line DepreciationThe following table summarizes the application of straight‐linedepreciation duringthe truck's five‐year useful life.

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Study GuideIf another depreciation method had been used, the accounts that appear in the entrywould be the same, but the amounts would be different.Companies use separate accumulated depreciation accounts for buildings,equipment, and other types of depreciable assets. Companies with a large numberof depreciable assets may even create subsidiary ledger accounts to track theindividual assets and theaccumulated depreciation on each asset.

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Study Guide2)Units-of-Activity (Units-of-Production) DepreciationThe useful life of some assets, particularly vehicles and equipment, is frequentlydetermined by usage. For example, a toy manufacturer may expect a certainmachine to produce one million dolls, or an airline may expect an airplane to provideten thousandhours of flight time.Example (Truck with miles)•Depreciable cost =$80,000•Expected miles in life =400,000 miles

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