FINANCIAL MANAGEMENT
CHECK POINT 55: CAPITAL ASSETS MANAGEMENT
This Check Point Is Available By Subscription Only,
But You Can Still Check Out The Menu Below. |
|
|
DO I NEED TO KNOW THIS CHECK POINT?
|
|
FINANCIAL MANAGEMENT
CHECK POINT 55: CAPITAL ASSETS MANAGEMENT
Please Select Any Topic In Check Point 55 Below And Click. |
|
|
DO I NEED TO KNOW THIS CHECK POINT?
|
|
WELCOME TO CHECK POINT 55 |
|
|
HOW CAN YOU BENEFIT FROM CHECK POINT 55? |
|
The main purpose of this check point is to provide you and your management team with detailed information about Capital Assets Management and how to apply this information to maximize your company's performance. |
|
In this check point you will learn: |
|
• About classification of capital assets.
• About capital assets register and records.
• About capital assets life span classification.
• About capital assets depreciation and depreciation factors.
• About three main capital assets depreciation methods.
• About modified accelerated cost recovery system.
• About accounting for additions and betterments.
• About accounting for ordinary and extraordinary repairs.
• About methods of asset disposal.
• About accounting rules for intangible capital assets... and much more. |
|
LEAN MANAGEMENT GUIDELINES FOR CHECK POINT 55 |
|
You and your management team should become familiar with the basic Lean Management principles, guidelines, and tools provided in this program and apply them appropriately to the content of this check point. |
|
You and your team should adhere to basic lean management guidelines on a continuous basis: |
|
• |
Treat your customers as the most important part of your business. |
• |
Provide your customers with the best possible value of products and services. |
• |
Meet your customers' requirements with a positive energy on a timely basis. |
• |
Provide your customers with consistent and reliable after-sales service. |
• |
Treat your customers, employees, suppliers, and business associates with genuine respect. |
• |
Identify your company's operational weaknesses, non-value-added activities, and waste. |
• |
Implement the process of continuous improvements on organization-wide basis. |
• |
Eliminate or minimize your company's non-value-added activities and waste. |
• |
Streamline your company's operational processes and maximize overall flow efficiency. |
• |
Reduce your company's operational costs in all areas of business activities. |
• |
Maximize the quality at the source of all operational processes and activities. |
• |
Ensure regular evaluation of your employees' performance and required level of knowledge.
|
• |
Implement fair compensation of your employees based on their overall performance.
|
• |
Motivate your partners and employees to adhere to high ethical standards of behavior. |
• |
Maximize safety for your customers, employees, suppliers, and business associates. |
• |
Provide opportunities for a continuous professional growth of partners and employees. |
• |
Pay attention to "how" positive results are achieved and constantly try to improve them. |
• |
Cultivate long-term relationships with your customers, suppliers, employees, and business associates. |
|
|
|
1. CLASSIFICATION OF CAPITAL ASSETS |
|
|
CAPITAL ASSETS |
Business owners and financial managers must have a good understanding about capital assets management, which represents an integral part of the financial management process.
Apart from utilizing inventory throughout the process of generating funds, the company has a need to acquire and to use additional assets in order to accomplish its commercial objectives. These assets have a useful life of more than one year and are known as Capital Assets, or Fixed Assets, or Long-Term Assets.
Accounting procedures related to Capital Assets Management are mainly concerned with the determination and recording of the cost of assets, methods of depreciation, disposal, and disclosure of assets in financial statements. There are two basic types of capital assets as illustrated below. |
TWO BASIC TYPES OF CAPITAL ASSETS |
|
|
|
Tangible Capital Assets |
|
Intangible Capital Assets |
These include land, buildings, production and office equipment, furniture, vehicles, airplanes, and boats, i.e. any physical substance.
|
|
These include patents, trademarks, copyrights, leaseholds, leasehold improvements, franchises, licenses, formulas, processes, and goodwill. |
|
|
|
ADDITIONAL INFORMATION ONLINE |
|
|
|
2. CAPITAL ASSET REGISTER |
|
|
CAPITAL ASSET REGISTER |
Capital Assets Management ensures thorough control over the purchase, utilization, storage, and disposal of company assets. The price of these assets normally includes all costs incurred during their acquisition, transportation, and installation on the company's premises.
Full details of purchased assets should be entered into the Capital Asset Register at cost. This register includes individual Capital Assets Records for equipment, vehicles, and other long-lived Assets. A typical Capital Asset Record is presented below.
Capital assets management can be maintained manually or by using a specific accounting software program. |
POPULAR ACCOUNTING SOFTWARE PROGRAMS |
There are several excellent Accounting Software Programs available to small business owners at present. Some of the most popular accounting software packages are presented below: |
• Sage One
• QuickBooks Intuit
• FreshBooks
• Harvest Software Systems
• NetSuite
|
Various accounting software programs may include additional functions, depending on each specific package. This is discussed in detail in Integrated Financial Management in Tutorial 3. |
|
ADDITIONAL INFORMATION ONLINE |
|
|
|
3. SMALL BUSINESS EXAMPLE
CAPITAL ASSET RECORD |
|
|
CAPITAL ASSET RECORD |
Asset Description: Vehicle. |
Asset Allocation: Sales Department. |
Purchase Date:
01.01.2009 |
Serial No: 12345 |
Original Cost: $20,000 |
Estimated Service Life:
5 Years |
Estimated Salvage
Value: $5,000 |
Method Of Depreciation: Straight line |
Disposal Date: 01.01.20014 |
Method Of Disposal:
( ) Sold; ( ) Trade-In; ( ) Scrap |
Year |
Beginning Book Value |
Annual
Depreciation
Expense |
Accumulated Depreciation |
Ending
Book
Value |
2009 |
$20,000 |
$3,000 |
$3,000 |
$17,000 |
2010 |
17,000 |
3,000 |
6,000 |
14,000 |
2011 |
14,000 |
3,000 |
9,000 |
11,000 |
2012 |
11,000 |
3,000 |
12,000 |
8,000 |
2013 |
8,000 |
3,000 |
15,000 |
5,000 |
|
|
|
4. CAPITAL ASSETS LIFE SPAN |
|
|
CAPITAL ASSETS LIFE SPAN |
The Useful Life of all tangible assets, except land, is limited to a certain number of years. For this reason, the total cost of such assets must be distributed over the expected period of useful service and applied as an operating expense.
This procedure is known as the Depreciation of capital assets, and it should be recorded in the Capital Asset Register in accordance with a particular Depreciation Method selected by management.
The Life Span of capital assets depends primarily upon the nature of their utilization and can be classified into two types illustrated below. |
TWO TYPES OF CAPITAL ASSETS LIFE SPAN |
|
|
|
The Technical Life Span |
|
The Economic Life Span |
|
|
|
|
5. CAPITAL ASSETS LIFE SPAN CLASSIFICATION |
|
|
A detailed classification of Capital Assets Life Span is outlined below. |
|
CAPITAL ASSETS LIFE SPAN CLASSIFICATION |
|
|
|
The Technical Life Span |
|
The Economic Life Span |
The technical life span is determined by various factors of an operational nature and terminates when the asset cannot provide further service for which it was purchased originally.
|
|
The economic life span depends upon various external factors, such as technological improvements or changing requirements, and terminates when the asset's performance becomes uneconomical. |
|
|
As soon as it has been selected, purchased, and installed on the company's premises, the asset starts to lose its original value due to depreciation and obsolesce. |
|
|
6. AICPA’s DEFINITION OF ASSETS DEPRECIATION |
|
|
DEPRECIATION |
According to the American Institute Of Certified Public Accountants (AICPA):
"The cost of productive facility is one of the costs of the services it renders during its useful economic life. Generally Accepted Accounting Principles (GAAP) require that this cost be spread over the expected useful life of the facility in such a way as to allocate it as equitably as possible to the periods during which services are obtained from the use of the facility.
This procedure is known as depreciation accounting, a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit... in a systematic and rational manner. It is a process of allocation, not of valuation." (10) |
|
|
7. CAPITAL ASSETS DEPRECIATION FACTORS |
|
|
DEPRECIATION |
There are several factors that affect the computation of Depreciation for a specific accounting period as outlined below. |
|
CAPITAL ASSETS DEPRECIATION FACTORS |
1. |
Cost.
This is the net purchase price paid to acquire a capital asset. Cost of an asset includes all relevant taxes and import duties, if applicable, as well as transportation and installation expenses. |
2. |
Salvage Value.
This is the estimated net price that is expected to be obtained once the capital asset is disposed, i.e. sold, traded-in, or scrapped. The salvage value is also termed Disposable Value, or Residual Value. |
3. |
Depreciable Cost.
The depreciable cost of a capital asset is the difference between its cost and salvage value. For example, a vehicle that costs $20,000 and has a salvage value of $5,000 would have a depreciable cost of $15,000. |
4. |
Estimated Service Life.
This is the total number of service units expected from a capital asset. Service units are usually measured in terms of the number of years the asset is expected to be in use, e.g. building or equipment. Sometimes, however, the estimated service life is measured in different terms, e.g. expected mileage from a vehicle or a truck, or the number of units expected to be produced by a particular machine. |
|
|
ADDITIONAL INFORMATION ONLINE |
|
|
|
8. CAPITAL ASSETS DEPRECIATION METHODS |
|
|
DEPRECIATION METHODS |
Several methods of depreciation are used by accountants to allocate the cost of a capital asset to a specific accounting period. Some of the most commonly used Depreciation Methods are illustrated below. |
CAPITAL ASSETS DEPRECIATION METHODS |
|
|
|
|
|
The Straight-Line Method |
|
The Production Method |
|
The Double-Declining Method |
|
|
|
ADDITIONAL INFORMATION ONLINE |
Please watch these excellent videos professionally narrated and produced by Susan Crosson and SFCC: |
|
© 2008 - 2013 Susan Crosson and CFCC. All rights reserved. |
|
|
9. THE STRAIGHT-LINE METHOD OF DEPRECIATION |
|
|
THE STRAIGHT-LINE METHOD OF DEPRECIATION |
The Straight-Line Method prescribes an equal distribution of depreciation over the estimated service life of a capital asset, taking into account its salvage value. Thus, according to the Straight-Line Method, the depreciation expense can be determined as follows:
Annual Depreciation = Cost - Salvage Value
Estimated Service Life
Consider, from the previous example, that an asset costs $20,000, its estimated service life period is 5 years, and its salvage value is $5,000. In this case, Annual Depreciation is determined as follows:
Annual Depreciation = $20,000 - $5,000 = $3,000
5 Years
The straight-line depreciation is characterized by the same depreciation expense during each year and gradual increase in Accumulated Depreciation. At the end of the estimated service life of capital asset, its Book Value, or Carrying Value, i.e. the difference between the cost of the asset and accumulated depreciation, equals the estimated salvage value.
Note:
Please consult with your accountant or CPA for additional information. |
|
|
10. SMALL BUSINESS EXAMPLE
THE STRAIGHT-LINE METHOD OF DEPRECIATION |
|
|
THE STRAIGHT-LINE METHOD OF DEPRECIATION |
Date |
Cost |
Annual
Depreciation |
Accumulated
Depreciation |
Ending Book
Value |
Purchase date |
$20,000 |
---- |
---- |
$20,000 |
End of 1st year |
20,000 |
$3,000 |
$3,000 |
17,000 |
End of 2nd year |
20,000 |
3,000 |
6,000 |
14,000 |
End of 3rd year |
20,000 |
3,000 |
9,000 |
11,000 |
End of 4th year |
20,000 |
3,000 |
12,000 |
8,000 |
End of 5th year |
20,000 |
3,000 |
15,000 |
5,000 |
|
|
|
11. THE PRODUCTION METHOD OF DEPRECIATION |
|
|
THE PRODUCTION METHOD OF DEPRECIATION |
The Production Method is based on allocating an equal depreciation expense in accordance with the actual use of a capital asset. The Production Method completely ignores the passage of time during which the asset is used and aims at determining the Depreciation Per Unit Of Service. Thus, according to the Production Method, the depreciation expense can be determined as follows:
Depreciation Per = Cost - Salvage Value
Unit Of Service Estimated Units Of Service Life
Consider, for example, a company vehicle that has an estimated service life of 100,000 miles. If the net cost of the vehicle is $20,000 and its salvage value is $5,000, the Depreciation Per Mile can be determined as follows:
Depreciation = $20,000 - $5,000 = $0.15 Per Mile
Per Mile 100,000 Miles
Note:
Please consult with your accountant or CPA for additional information. |
|
|
12. SMALL BUSINESS EXAMPLE
THE PRODUCTION METHOD OF DEPRECIATION |
|
|
THE PRODUCTION METHOD OF DEPRECIATION |
Date |
Cost |
Miles |
Annual Depreciation |
Accumulated Depreciation |
Ending
Book Value |
Purchase
date |
$20,000 |
---- |
---- |
---- |
$20,000 |
End of 1st year |
20,000 |
15,000 |
$2,250 |
$2,250 |
17,750 |
End of 2nd year |
20,000 |
25,000 |
3,750 |
6,000 |
14,000 |
End of 3rd year |
20,000 |
30,000 |
4,500 |
10,500 |
9,500 |
End of 4th year |
20,000 |
20,000 |
3,000 |
13,500 |
6,500 |
End of 5th year |
20,000 |
10,000 |
1,500 |
15,000 |
5,000 |
|
|
|
13. CHARACTERISTICS OF THE PRODUCTION METHOD OF DEPRECIATION |
|
|
CHARACTERISTICS OF THE PRODUCTION METHOD OF DEPRECIATION |
Company's vehicles are usually depreciated on the basis of the Production Method as illustrated above. In this case the actual Annual Depreciation will depend upon the annual mileage traveled by a particular vehicle. Since most vehicles and trucks are usually kept by a company for a period not exceeding 5 years, the above depreciation schedule covers the same period.
The Production Method is characterized by unequal depreciation during each year of use. The Depreciation Expense is determined in direct relation to actual output obtained from the capital asset, e.g. the mileage of the company's vehicle. At the end of the asset’s estimated service life, i.e. passage of 100,000 miles, its Ending Book Value equals to the estimated Salvage Value, provided of course, that there were no major accidents. |
|
|
14. THE DOUBLE-DECLINING-BALANCE METHOD OF DEPRECIATION |
|
|
THE DOUBLE-DECLINING-BALANCE METHOD OF DEPRECIATION |
The Double-Declining-Balance Method is an accelerated method of depreciation that prescribes application of a fixed percentage against the ending book value of the capital asset.
The fixed percentage used in the Double-Declining-Balance Method equals twice the straight-line percentage. Thus, if the estimated service life of an asset is 5 years, the annual percentage for depreciation, in this case will be as follows:
Annual Depreciation Rate = 2 x 100% = 40%
5 Years
The use of data from the Straight-Line Method and application of a fixed 40% annual depreciation rate to the ending book value provides the result illustrated below.
Note:
Please consult with your accountant or CPA for additional information. |
|
|
15. SMALL BUSINESS EXAMPLE
THE DOUBLE-DECLINING-BALANCE METHOD OF DEPRECIATION |
|
|
THE DOUBLE-DECLINING-BALANCE METHOD OF DEPRECIATION |
Date |
Cost |
Annual
Depreciation |
Accumulated Depreciation |
Ending Book
Value |
Purchase date |
$20,000 |
- |
- |
$20,000 |
End of 1st year |
20,000 |
40% x $20,000 = $8,000 |
$8,000 |
12,000 |
End of 2nd year |
20,000 |
40% x $12,000 = $4,800 |
12,800 |
7,200 |
End of 3rd year |
20,000 |
|
2,200 * |
5,000 |
End of 4th year |
20,000 |
|
|
5,000 |
End of 5th year |
20,000 |
|
|
5,000 |
* Depreciation is limited to an amount necessary to reduce the Ending Book Value to Salvage Value (refers to $2,200 above). |
|
|
|
|
16. CHARACTERISTICS OF THE DOUBLE-DECLINING-BALANCE METHOD |
|
|
CHARACTERISTICS OF THE DOUBLE-DECLINING-BALANCE MET |
The Double-Declining-Balance Method is characterized by very substantial depreciation during the first year of the asset's use and declining depreciation during each year thereafter.
Final depreciation is limited to the amount necessary to reduce the Ending Book Value to the Estimated Salvage Value of the asset. For this reason, depreciation in the example above is applied in full only during the first two years. Partial depreciation of $2,200 is applied during the third year to bring the ending book value of the asset to $5,000, i.e. the estimated salvage value. |
|
ADDITIONAL INFORMATION ONLINE |
|
|
|
17. POPULARITY OF VARIOUS METHODS OF DEPRECIATION |
|
|
SURVEY BY THE AICPA |
According to recent surveys of 600 companies by the American Institute of Certified Public Accountants (AICPA), the Straight Line Method of depreciation is by far the most popular method.
The total percentage above exceeds 100% since some companies use more than one depreciation method. (11) The final results are outlined below. |
POPULARITY OF VARIOUS METHODS OF DEPRECIATION |
1. |
The Straight Line Depreciation Method - about 95% of companies. |
2. |
The Accelerated Depreciation Method - about 17% of companies. |
3. |
The Production Depreciation Method - about 8% of companies. |
|
|
|
18. ADDITIONAL ACCOUNTING RULES FOR DEPRECIATION |
|
|
IMPORTANCE OF TIMING IN CAPITAL ASSETS DEPRECIATION |
Another important aspect of capital assets depreciation relates to the Timing Of The Purchase.
In most cases, capital assets are purchased when they are needed and disposed of when they are no longer useful. Consequently, it is often necessary to determine the Depreciation For Partial Accounting Periods. If an asset has been purchased at some point during a particular accounting period, the depreciation calculation should be rounded off to the nearest month, as outlined below. |
DEPRECIATION FOR PARTIAL ACCOUNTING PERIODS |
1. |
If the purchase date is between the 1st and the 15th of the month, the calculation of depreciation should start from the first day of that month |
2. |
If the purchase date is between the 16th and 31st of the month, the calculation of depreciation should start from the first day of the next month. |
|
|
|
19. SMALL BUSINESS EXAMPLE
DEPRECIATION FOR PARTIAL ACCOUNTING PERIODS |
|
|
DEPRECIATION FOR PARTIAL ACCOUNTING PERIODS |
Assume, for example, that the company's fiscal year starts on January 1 and ends on December 31. If a capital asset was purchased on August 15, the depreciation must be recorded for 5 full months. The 5 month depreciation based on the data from the Straight-Line Method example is calculated as follows:
(Cost - Salvage Value) x Depreciation Period
Estimated Service Life 12 Month
Or:
($20,000 - $5,000) x 5 = $1,250
5 Years 12
Note:
Please consult with your accountant or CPA for additional information. |
|
|
20. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) |
|
|
MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) |
In 1981 the Congress approved a new method of depreciation, the Modified Accelerated Cost Recovery System (MACRS). In accordance with this method, the concepts of service life value and salvage value of a capital asset could be discarded, and, instead, a cost recovery allowance would have to be computed on the following basis, as outlined below. (12)
The capital asset to be recovered under MACRS was generally defined as tangible property subject to depreciation and placed in service between December 31, 1980 and January 1, 1987. |
COST RECOVERY ALLOWANCE BASED ON MACRS |
1. |
On the unadjusted cost of capital assets being recovered. |
2. |
Over a period of years prescribed by the law for all capital assets of a similar type. |
3. |
By applying the straight-line method or by prescribed percentages not exceeding 150% of the declining balance method with a half-year convention. |
|
Note:
Please consult with your accountant or CPA for additional information. |
|
|
21. THE TAX REFORM ACT OF 1986 |
|
|
THE TAX REFORM ACT OF 1986 |
In 1986 the Congress passed The Tax Reform Act Of 1986, outlining new federal tax laws. According to these laws, the basic MACRS concepts were retained with the following changes outlined below. (13) |
|
DETAILS OF THE TAX REFORM ACT OF 1986 |
1. |
The accelerated method prescribed by the new law for most capital assets, excluding real estate, is based on a 200% declining balance with a half-year convention. |
2. |
The new law applies to all capital assets placed in service after December 31, 1986. |
3. |
The MACRS applies to all capital assets placed in service before January 1987. However, for capital assets placed in service between July 31, 1986 and January 1, 1987, the new law may apply, based on an asset-by-asset evaluation. |
|
Note:
Please consult with your accountant or CPA for additional information. |
|
|
22. ACCOUNTING FOR ADDITIONS AND BETTERMENTS |
|
|
ADDITIONS AND BETTERMENTS |
Capital asset management also entails control over capital expenditures which relate to Additions and Betterments of existing assets illustrated below. |
|
ADDITIONS AND BETTERMENTS TO CAPITAL ASSETS |
|
|
|
Additions |
|
Betterments |
Additions are enlargements of the physical capacity of an asset, e.g. an additional floor is added to the existing building.
|
|
Betterments are improvements to capital assets that do not change its physical size, e.g. an air-conditioning system installed in the existing building. |
|
|
In both cases, the expense must be capitalized over a number of years and depreciated as an ordinary capital asset. (14)
Note:
Please consult with your accountant or CPA for additional information. |
|
|
23. ACCOUNTING FOR ORDINARY AND EXTRAORDINARY REPAIRS |
|
|
THE REVENUE EXPENDITURE |
Another important element of capital asset management relates to Revenue Expenditure. The revenue expenditure includes cost of repairs, maintenance, consumables, and other items needed to operate and to maintain a capital asset.
All revenue expenditures must be charged to the Operating Expense Account since they provide a benefit only during the current accounting period. It is necessary, however, to distinguish between ordinary and extraordinary repairs outlined below. (15). |
ACCOUNTING FOR ORDINARY AND EXTRAORDINARY REPAIRS |
1. |
Ordinary Repairs.
Ordinary repairs relate specifically to maintaining a capital asset in good working condition and are treated as an operating expense. |
2. |
Extraordinary Repairs.
Extraordinary repairs are more significant in nature, e.g. overhaul of a water boiler will result in extension of the estimated service life of this capital asset. The total cost of extraordinary repairs must be debited from the accumulated depreciation of the asset, thereby increasing its book value. Subsequently, the asset must be depreciated again by applying the usual depreciation method. |
|
Note:
Please consult with your accountant or CPA for additional information. |
|
|
24. METHODS OF ASSET DISPOSAL |
|
|
ADDITIONS AND BETTERMENTS |
Once a capital asset is no longer required or cannot be used by the company, it should be disposed of. Three main Methods Of Asset Disposal are illustrated below. |
|
METHODS OF ASSET DISPOSAL |
|
|
|
|
|
Sale |
|
Trade-in |
|
Scrap |
In this case the asset is sold to another party for cash. |
|
In this case the asset is used as a down-payment to purchase or is exchanged for another asset. |
|
In this case the asset does not have meaningful value and is sold as scrap or simply given away. |
|
|
Note:
Please consult with your accountant or CPA for additional information. |
|
ADDITIONAL INFORMATION ONLINE |
|
|
|
25. ACCOUNTING OF ASSET DISPOSAL |
|
|
GAIN OR LOSS ON THE CAPITAL ASSET DISPOSAL |
Regardless of method of disposal, it is necessary to determine a Gain Or Loss On The Capital Asset Disposal as illustrated below. |
|
ACCOUNTING OF ASSET DISPOSAL |
|
|
|
Gain On Disposal |
|
Loss On Disposal |
If the cash received through disposal of the asset exceeds its ending book value, the difference is termed the gain on disposal.
|
|
If the cash received through disposal of the asset is less than its ending book value, the difference is termed the loss on disposal. |
|
|
Note:
Please consult with your accountant or CPA for additional information. |
|
|
26. ACCOUNTING PROBLEMS FOR INTANGIBLE CAPITAL ASSETS |
|
|
INTANGIBLE CAPITAL ASSETS |
Capital assets management also entails control over purchase, recording, and disposal of Intangible Assets, i.e. patents, copyrights, trademarks, goodwill, and others as described earlier.
Accounting problems that relate to intangible assets are the same as those related to tangible ones. According to the Accounting Principles Board, the three main problems are outlined below. (16). |
ACCOUNTING PROBLEMS FOR INTANGIBLE CAPITAL ASSETS |
1. |
Determination of an initial carrying amount, i.e. initial cost. |
2. |
Reduction of the initial cost, after acquisition, under normal business conditions through periodic write-off, or amortization, in a manner similar to depreciation. |
3. |
Accounting for the initial cost if the asset's value declines substantially and permanently. |
|
|
AMORTIZATION OF INTANGIBLE CAPITAL ASSETS |
In addition to the abovementioned problems, intangible assets have no physical qualities, and their value and service life may be quite difficult to estimate.
In accordance with the decision of the Accounting Principles Board, all intangible assets purchased from others must be recorded as assets and written off through periodic Amortization.
If, however, intangible assets are developed by the company, all development costs must be treated as Operating Expenses. Additional information related to intangible assets is summarized below.
Note:
Please consult with your accountant or CPA for additional information. |
|
|
27. ACCOUNTING RULES FOR INTANGIBLE CAPITAL ASSETS |
|
|
ACCOUNTING RULES FOR INTANGIBLE CAPITAL ASSETS |
Type |
Description |
Special Accounting Guidelines |
Patent |
Patent is an exclusive right to make a particular product or use a specific process. This right is granted by the federal government to the patent owner for a period of 17 years |
A patent must be recorded at the acquisition cost and amortized over its useful life period, which may be less than the legal life of 17 years. The cost of successfully defending a patent in a patent infringement suit must be added to the patent acquisition cost. |
Copyright |
Copyright is an exclusive right to publish and sell literary, musical, and other artistic materials. Copyright also includes computer software programs. This right is granted by the federal government to the copyright owner for a period of the author's life plus 50 years. |
A copyright must be recorded at the acquisition cost and amortized over its useful life period, which may be less than the legal life, but not to exceed 40 years. |
Trademark, Service Mark |
A trademark or a service mark is a registered symbol or name giving the exclusive the right to the owner to use it to identify products or services in a specific class category. |
The trademark or service mark must be recorded at the acquisition cost, and amortized over its useful life period not to exceed 40 years. |
Franchise,
License,
Formula,
Process |
Franchise, license, formula, or process provides the right to the owner to make and sell a unique brand of a product or service in an exclusive territory. |
The franchise, license, formula, or process cost must be recorded at the acquisition cost and amortized over its useful life period not to exceed 40 years. |
Leasehold |
Leasehold provides the right to the user (leasee) to occupy land or buildings under a long-term rental contract with the property owner (leaser). |
The leasehold cost must be amortized by the user (leasee) over the lease period. Payments to the property owner (leaser) during the lease period must be debited to lease expense account. |
Leasehold Improvement
|
Leasehold improvements to leased property made by the leasee become the property of the leaser at the end of the lease. |
The leasehold improvements cost must be amortized over the lease period and debited to the lease expense account. |
Goodwill |
Goodwill may apply to an existing business organization and its' value depends upon the organization's ability to generate profits during a specified period in the future. |
The cost of goodwill must be amortized by the new owners, who purchase the existing business from current owners, over a reasonable period not to exceed 40 years. |
|
|
|
28. FOR SERIOUS BUSINESS OWNERS ONLY |
|
|
ARE YOU SERIOUS ABOUT YOUR BUSINESS TODAY? |
Reprinted with permission. |
|
29. THE LATEST INFORMATION ONLINE |
|
|
|
LESSON FOR TODAY:
The Essence Of Good Capital Assets Management Is To Maximize Your Company's Capital!
|
Go To The Next Open Check Point In This Promotion Program Online. |
|
|