Ch-2 accu 2

•Nature of plant asset

•The term plant assets (or plant end equipement) describe long lived assets acquired for use in business
operation rather than for resale to customer’s.
• plant assets comprise largest portion of assets.

•In other words, plant assets represent the most significant category of
assets owned by customers compared to other types of assets such as
financial investments, inventory, or intangible assets.
• This interpretation aligns with the understanding that plant assets,
being tangible assets used for business operations, often represent a
substantial investment for companies and can account for a significant
portion of their total asset base.

• Major categories of plant assets

•Plant and equipment items are often classified in to the following groups.
•
A. Tangible plant assets
• The term “tangible” denotes physical substance, as exemplified by land, a building or
machinery. This category may be subdivided is to two distinct classification.
1.Plants, properties subject to depreciation included are plant assets of limited useful
life such as buildings and office equipment etc.
2.Land the only plant asset not subject to depreciation land, which has on unlimited
term of existence

b. Intangible assets:
The term “intangible assets” is used the describe assets which are used in the operation
of the business but have no physical substance and are non current.
Examples include patents, copy rights, trade mark, franchises, and good will.
• Note;- here current asset such as accounts receivable or prepaid rent are not
included in the intangible classification even though they are lacking in physical
substance.
• Natural resources: A site acquired for the purpose of extracting or
removing some valuable resource such as oil, minerals, or timber is
classified as a natural resource.
• Acquisition cost of plant assets
• The cost of a plant asset includes all expenditures that are reasonable and
necessary for getting the asset to desired location and ready for use.
• Thus many incidental costs may be included in the cost assigned to a plant asset.
These include for example, sales taxes on purchase price, delivery costs, and
installation cost, etc …
Allocation of a lamp sum purchase
• the allocation of a lump sum purchase price among different types of
plant assets ensures accurate reporting of the assets' values and
facilitates proper accounting treatment, including depreciation or
amortization, over time. This process often involves professional
appraisal to determine fair market values and is crucial for financial
reporting and taxation purposes.
• Several difference types of plant assets, often are purchased at one
time, with single total price
• separate controlling accounts are maintained for each type of plant
asset, such or land, buildings and equipment. When land, buildings
(and perhaps other assets) are purchased for lamp sum the purchase
price must be allocated among the types of assets acquired. An
appraisal may be needed for this purpose.
• Appraisal: In many cases, determining the fair market value of each
asset type may require a professional appraisal. An appraiser assesses
the value of each asset based on factors such as its condition, location,
market demand, and comparable sales in the area. The results of the
appraisal help in allocating the purchase price accurately among the
different asset types.
• Section 2
• Depreciation
• Depreciation :- is the process of allocating the cost of building and
equipment over their productive lives using systematic and rational method.
• Students often are confused by the concept of depreciation as accountants
use it.
• In accounting depreciation is the process of cost allocation not process of
determine an assets current market value or worth.
• This section demonstrate the way cost of plant asset be allocated over the
use full life of the asset.
• Tangible plant assets, with the exception of land, are of use to a
company for only a limited number of years.
• Depreciation is the allocation the cost of tangible plant asset to
expense in the periods in which services are received from the asset.
• In short the basic objective of depreciation is to achieve the
matching principle that is to offset the revenue of an accounting
period with the costs of the goods and services being consumed in the
effort to generate that revenue.
• The credit portion of the journal entry removes from the balance sheet that portion
of the assets cost estimated to have been used up during the current period. The
debit portion of the entry allocates this expired cost to expense.
• Depreciation differs from most other expenses in that
Þit does not depend up on cash payments at or near the time the
expenses is recorded.
ÞFor this reason depreciation often called a “non cash” expense.
ÞBear in mind, how ever that large cash payment may be required at
the time depreciable asset is purchased.
• Book value of a plant asset is its cost minus the related
accumulated depreciation.
• Accumulated depreciation in a contra-asset account
representing portion of the assets cost that these already been
allocated to expense.
• Book value = Cost of the asset - Accumulated depreciation
• Causes of depreciation
• There are two main causes of depreciation. These are physical deterioration and
obsolescence.
1. Physical deterioration: this results from use as well as from exposure to sun,
wind, and other climatic factors.
2.Obsolescence: means the process of becoming out of data or obsolete.
A refrigerator for example, may become obsolete even though it is in excellent
physical condition; it becomes obsolete because better refrigerator of superior
design and preference have become available
• Alternative depreciation methods
• Because of significant differences among companies and the assets they own,
• accountants have not be able to agree on a single best method of depreciation as a
result, managers may choose from several different acceptable depreciation
methods.
•To calculate depreciation expense three amounts are reformed for each asset.
1. Acquisition cost
2. Estimated useful life of the asset
3. estimated residual value (selvage value)
• Useful life :-represents managements estimated of the assets useful economic life
to the company rather than its total economic life to all potential users.
• The assets expected physical life is often larger than the company methods to use
the asset.
• It's a forward-looking assessment aimed at determining how long the
asset will remain productive and valuable within the company's
specific operational context.
• Residual (or selvage) value:- represents managements estimated of the amount
the company expects to resource up on disposal of the asset at the end of its
estimated useful life.
•There are several depreciation methods in application: some of these are
i. Straight line
ii. units of production
iii.declining balance
iv. sum of the years method
Revenue & capital expenditure
• expenditures for the purchase for expansion of plant assets are called
capital expenditures and are recorded in asset accounts.
• Accountants often use the verb capitalize to mean charging
expenditure to an asset rather than to an expense account.
• Expenditures for ordinary repairs, maintenance, fuel and other items
necessary to the ownership and use of plant and equipment are called
revenue expenditures and are recorded by debiting expense
accounts.
• difference between revenue and capital expenditures. Capital
expenditures involve purchases that increase the company's asset base,
such as acquiring new equipment or expanding facilities. These are
recorded as assets on the balance sheet and depreciated over their
useful lives. Revenue expenditures, on the other hand, are costs
incurred to maintain or support existing assets, such as repairs and
maintenance. These are expensed immediately and deducted from
revenue in the current period's income statement. This differentiation
is crucial for accurate financial reporting and helps in evaluating a
company's financial health and performance over time.
•
•Section three

•Disposal of plant asset and equipment

•As units of plant and equipment wear out or become obsolete they must
be scrapped ,sold or trade-in on new equipment.

•Scrapped: When an asset is scrapped, it means that it is no longer

functional or useful, and its only value lies in its component parts or
materials. The company may dismantle the asset and sell its parts or
materials as scrap. Scrapping is typically done for assets that are damaged,
obsolete, or beyond repair.

•Sold: When an asset is sold, it means that the company transfers

ownership of the asset to another party in exchange for a monetary
payment.

•Trade-in on new equipment is a process where a company exchanges its

existing equipment as partial payment for new equipment purchased from
• Upon the disposal or retirement of depreciable asset the
cost of property is removed from the related contra asset
account. (Accumulated depreciation).
• The book value of an asset is its original cost minus any accumulated
depreciation or impairment charges. In simpler terms, it's the value of
the asset as recorded on the company's books.
• Here's how you calculate it:
• Book Value=Original Cost of Asset−Accumulated
• The book value is important because it represents the amount of the
asset's cost that has not yet been expensed through depreciation.
• It's also used to determine the asset's worth for accounting and
financial reporting purposes.
• However, it's essential to note that the book value may not reflect the
true market value(fair value) of the asset, especially if market
conditions or other factors have changed since the asset was acquired.
Section 4
Natural resource
• Natural resources include mines, oil fields and standing timber .
• Amortization :- is the process of spreading out the cost of an
intangible asset over its useful life.
• Intangible assets include things like patents, copyrights, trademarks,
and goodwill, which lack physical substance but still hold value to a
business.
• how amortization works with an example:
• Imagine a company purchases a patent for a new technology for
$100,000. The patent has a useful life of 10 years. Instead of
expensing the entire cost of the patent in the year it was acquired, the
company spreads the cost over its useful life through amortization.
• Calculate the Annual Amortization Expense:
• The annual amortization expense is calculated by dividing the cost of
the intangible asset by its useful life.
• In this case:
Annual Amortization Expense=Cost of Intangible Asset/Useful Life
of Intangible Asset​
• So, for the patent:
Annual Amortization Expense=$100,000/10 years=$10,000 per year
• Record the Amortization Expense: Each year, the company records
an amortization expense of $10,000 on its income statement. This
expense reduces the company's net income for the year.
1.Update the Intangible Asset's Book Value: Each year, the book value of
the intangible asset is reduced by the amount of the annual amortization
expense.
• At the end of the first year, the book value of the patent would be:
• Book Value=Cost of Intangible Asset−Accumulated Amortization
• Book Value=$100,000−$10,000=$90,000
• This process continues each year until the end of the asset's useful life, at
which point the asset's book value would be zero.

• Amortization allows companies to match the expense of intangible assets

with the revenue they generate over their useful lives, providing a more
accurate representation of the asset's impact on the company's financial
performance.