Acquisition and depreciation of long-term assets are important to understand because these assets represent a business’s largest investment of resources. Recording the correct cost for an asset can be difficult because there are many costs associated with the purchase or construction of a tangible property, and there are many legal fees associated with the purchase of a real property.
After assets have been acquired or constructed, they can be depreciated over a period of time. Depreciation is not meant to show the decline in the value of a property. Depreciation refers to how the asset is used or charged over a period of time—its useful life. A company will record depreciation on the books in order to follow the generally accepted accounting principle (GAAP) matching principle. The matching principle occurs when expenses are matched to revenues. The revenue generated from the asset purchased is matched to depreciation expense.
Before you begin, please complete your reading assignment and view the presentations for the week.
Discussion Topic
Imagine that you own or work for a business as you discuss the following information in your initial post:
In your original post, answer the following:
- Identify and describe your business (e.g. clothing store, landscaping business, delivery service, or restaurant).
- Provide two examples of long-term assets that the business owns.
- Classify the assets (i.e. building, equipment, furniture and fixtures, etc.).
- What depreciation method will you use to depreciate this asset? Explain why.
- How does depreciation affect the income statement and balance sheet?
- Explain how depreciation might affect your decisions to purchase expensive equipment or real estate.
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