Archive: Jul 2011

Understanding the Historical Cost Principle

Under Generally Accepted Accounting Principles, the original cost of a fixed asset acquisition must be initially recorded. An allowance for depreciation is made, but the cost is not adjusted to current market value – i.e. the amount that would be realized if the asset were sold. This method, known as the historical cost principle, may distort your company’s balance sheet. Simply put, a balance sheet is a record of your organization’s total assets, liabilities and ownership equity at a particular point in time – typically the last day of an accounting period. The larger your business, the more complex your…

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The Guide to Recording Depreciation

Although there are several processes that can be used to calculate depreciation – the straight-line method, the units of production method and two accelerated methods known as declining balance and sum-of-the-year’s-digits – there is only one way to record it. This being said, the frequency of calculating depreciation can differ. Your company may record its depreciation expenses on an annual basis, quarterly, monthly or according to another unit of measurement. The same process will be used regardless, but the amounts will be different. When calculating fixed asset depreciation, two types of accounts should be used – depreciation expense and accumulated…

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Calculating Gain and Loss in Fixed Asset Accounting

Simply put, gain occurs when the sales price of a fixed asset exceeds the asset’s book value and loss occurs when the fixed asset’s sales price is lower than its book value. Although the concepts seem easy, many people struggle with figuring the gain or loss from the disposition of their assets. Often, organizations run into trouble when they want to sell fixed assets in the middle of the depreciation process. If you’re looking to sell a piece of office equipment midway through its depreciation process, you need to calculate the yearly depreciation of the item. This will allow you…

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What the 2010 Tax Relief Act Means to You

Under the 2010 Tax Relief Act, bonus depreciation expensing limits were adjusted to the advantage of business owners. Specifically, certain fixed assets that were brought into service on or after September 9 of last year qualify for 100 percent bonus depreciation. This bonus depreciation period will continue until the last day of 2012. Long-production-period property is also subject to the same rate of depreciation if it is acquired before January 1, 2012 and placed in service within a year. For calendar year 2012, the bonus ceiling will be 50 percent. The extension provisions also permit corporations to increase the minimum…

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Asset Depreciation: How Do You Handle It?

When your business acquires a new asset, you must assign a depreciation value to write off the initial cost over the item’s lifespan. To qualify for depreciation, you need to use the asset for more than a year to produce income, according to the United States Internal Revenue Service. A business should consider the different options that exist when looking to determine the depreciation value of a new asset. Formulas can be complicated and difficult to understand, but asset management software can handle those details, taking the responsibility of worrying about accounting errors out of your hands. Straight-Line Method The…

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