Chapter 7 - Fixed Assets and Intangible Assets
Fixed assets - Are long term assets or relatively permanent assets such as equipment,
machinery, buildings and land
1. They exist physically and thus are tangible assets
2. They are owned and used by the company in it’s normal operations
3. They are not offered for sale as part of normal operations
1. Is the purchased item (cost) long lived?
a. If yes, the item is capitalized as an asset on the balance sheet as either a fixed
asset or an investment (Proceed to step 2)
b. If no, the item is classified and recorded as an expense
2. Is the asset used in normal operations?
a. If yes, the asset is recorded as a fixed asset
b. If no, the asset is recorded as an investment
* Standby equipment for use during peak periods or when other equipment breaks down is still
classified as a fixed asset even though it’s not used very often. Fixed assets that have been
abandoned or are no longer used are no longer fixed assets
● Fixed Assets may be sold but, they should not be offered for sale as part of the normal
operations. For example, cars and trucks offered for sale by an automotive dealership,
are not fixed assets of the dealership. On the other hand, a tow truck used in the normal
operations of the dealership is a fixed asset of the dealership
Investments - Are long lived assets that are not used in normal operations and are held for
future resale. Such assets are reported on the balance sheet under a section entitled
investments. For example, undeveloped land acquired for future resale, would be classified as
an investment, not land.
The Cost of Fixed assets:
● The cost of acquiring fixed assets include all amounts spent to get the asset in place and
ready for use. For example, freight costs and the cost of installed equipment are part of
the assets total cost.
● On costs necessary for preparing the fixed asset for use are included as a cost of the
asset. Unnecessary costs that do not increase the assets usefulness are recorded as an
expense. For example:
○ Mistakes in installation
○ Uninsured theft
○ Damage during unpacking and installing
○ Fines for not obtaining proper permits for governmental agencies
➔ Once a fixed asset has been acquired, costs may be incurred for ordinary maintenance
and repairs. In addition, costs may be incurred to improve an asset or increase the assets life. Costs that only benefit the current period are called revenue expenditures.
Costs that improve the asset or extend the assets useful life are called capital
➔ Costs related to ordinary maintenance and repairs of a fixed asset are recorded as an
expense of the current period. Such expenditures are revenue expenditures and are
recorded as increases to Repairs and Maintenance Expense.
➔ Costs incurred to improve an asset are capital expenditures and are recorded as an
increase to the fixed assets account. Increases the value of the asset and decreases
cash by the same amount.
➔ Extraordinary repairs are also capital expenditures. They are costs incurred to extend
the assets useful life. Recorded in the accounts as as a decrease in accumulated
depreciation and a decrease in cash.
Accounting for Depreciation:
● Fixed assets, with the exception of land, lose their ability overtime to provide services
● The cost of a fixed asset such as a building or equipment, is recorded as an expense
throughout its useful life. Because land has an unlimited life it is not depreciated.
● The adjustment to record depreciation increases Depreciation Expense and
● Depreciation can be caused by physical or functional factors:
○ Physical Depreciation includes wear and tear during during use or from exposure
○ Functional Depreciation includes obsolescence and changes in the customer’s
needs that cause the asset to no longer provide services for which it was
Two Common Misconceptions that exist about Depreciation in Accounting:
● Depreciation does not measure a decline in the market value of a fixed asset. Instead,
depreciation is an allocation of a fixed assets cost to expense over the asset’s useful life.
*Book Value = Cost - Accumulated depreciation
● Depreciation does not provide cash to replace fixed assets as they wear out.
Factors in Computing Depreciation expense:
1. The asset’s initial cost
2. The asset’s expected useful life
3. The asset’s estimated residual value
*Residual Value of a fixed asset at the end of its life is estimated at the time it is put into service