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The Fixed Asset Capitalization Depreciation Procedure describes how to delineate capitalization and depreciation methods for various asset groups.
This Fixed Asset Capitalization 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)
Fixed Asset Capitalization Depreciation Definitions:
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.
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.