This Fixed Assets Capitalization and Depreciation Procedure applies to all acquisitions with more than a one-year useful life expectancy and a minimum threshold amount as specified by the controller. (4 pages, 1232 words)
Capitalization – Capitalization is the method chosen to record the purchase of a fixed asset on the Company’s accounting books. If an asset is capitalized then it is not expensed in the same year the asset is purchased. Instead the asset is generally recorded on the balance sheet and individually on an asset schedule. Examples of capital expenditures are purchases of land, buildings, machinery, office equipment, leasehold improvements, and vehicles. The asset is expensed each year as depreciation.
Depreciation – is an annual income tax deduction that allows the write-down or write-off of the cost of the asset over its estimated useful life to recover the cost or other basis of certain property over the time the property is used. It is an allowance expense for the wear and tear, age, deterioration, or obsolescence of the property.
As an asset ages and is used by the company, its’ value declines. It, in effect, becomes worth less and less over time. The declining value or usefulness of the asset over time is represented as a discount that is applied to the original purchase price. At the end of the asset’s depreciation period, (and/or useful life), its value on the balance sheet will be zero, or fully-depreciated. At the same time, the individual depreciation expenses will have all been recorded on the income statement.
Note: Land is not depreciated because land does not wear out, become obsolete, or get used up. But the building on the land is depreciated. Land is generally viewed as an appreciating asset while all other capital assets are generally viewed as depreciating over time, with use. But, unlike depreciation, an asset’s appreciation is not recorded on the books until the asset is sold, which is when the assets appreciation is realized.
Cost basis – The total amount paid for the asset, in cash or kind, is considered the “cost-basis.” This should include all charges relating to the purchase, such as the purchase price, freight charges, and installation, if applicable. The cost basis is not the market value or list price of the asset. It is the total amount invested in the purchase or the total amount paid.
Fixed Assets Capitalization and Depreciation Procedure Activities
- Assets Capitalization
- Assets Depreciation
Fixed Assets Capitalization and Depreciation Procedure References
- IRS Publication 964 “How to Depreciate Property”