Capital assets

You may be more familiar with the older term "Fixed Assets." As mentioned above, these are assets that have long-term value to the company, and provide your business with the capacity to operate.

Capital assets are initially recorded at their cost to purchase. If there are additional costs - such as installation costs for equipment or legal fees on a land purchase - these are included in the cost of the asset and not expensed separately, as they are an integral part of the asset. Each period, depreciation (also called amortization) is taken on the undepreciated balance of the asset. Depreciation recognizes that most capital assets are worth less over time and that the value assigned to a capital asset should correspondingly decline. Each type of asset gets depreciated at a different rate; some are straight line (meaning that the same amount is depreciated each period); some are declining balance (meaning that a percentage of the remaining undepreciated balance is depreciated every period). Here are some examples:

Manufacturing equipment purchased for $1,250 - 30% declining balance means ­

1) Initial entry:

    DR Equipment                                   $1,250

    CR Cash (or Accounts payable)                      $1,250

2) Depreciation entry end of year:

  DR Depreciation expense (30% X $1,250) $375

  CR Accumulated depreciation - equipment        $375

 

In the next year, depreciation would be 30 percent of the remaining undepreciated balance (that is, $875) or $262.50.

The accumulated depreciation account is a contra account: it nets the equipment account balance downwards. Therefore, the net of the equipment account and the accumulated depreciation account is meant to be an approximation of the worth of the asset. Of course, it will never perfectly reflect the fair market value of the asset. As depreciation rates and methods differ between asset types and between countries, you should talk to your accountant about the capital assets on your balance sheet.