Lecture Week 1

ACC 206- Accounting II

In ACC 100, you got your feet wet with various discussions of journal entries, trial
balances, balance sheets and income statements. The topic for this wee will be
!"rinciple Assets#. In balance sheet order, we will cover intangibles and $%ed assets.
&ach component of the balance sheet has to be presented a certain way, and
adjusted accordingly when events happen. 'e(ll e%plore what they are, how to
record them, and how to adjust the accounts in certain circumstances.
Intangible Assets- What are they?
Intangible assets are very interesting to wor with. These assets are not physical,
and are created by a contract or a license. 'hat these assets )* is to C+&AT& value
to a company that owns them. Intangible assets include, patents, copyrights,
trademars, franchises and goodwill.
These assets are recorded at cost and amorti-ed using the straight.line method
over the life of the asset. /ow is their life determined0 &ach one of these intangible
assets seem to have a life of their own,
Patents. about a 10 year life
Copyrights. life of the creator plus 20 years
Trademarks. not amorti-ed
Franchises & Licenses. determined over its useful life. If you can(t estimate, you
can(t amorti-e
Goodwill. not amorti-ed. 3ears ago this asset was amorti-ed over 40 years.
'e have goodwill on our balance sheet. 'e ac5uired several companies through the
years. +emember you create goodwill only when you purchase 1006 of a business.
7oodwill is recorded by taing the assets of this company less its liabilities. If by
chance 8and my company has had the chance9 the ac5uired company becomes
permanently impaired either a little or in its entirety, goodwill must be written down
to re:ect the true current value of the company. ;or e%ample, we had a subsidiary a
few years ago that had goodwill of <10 million on its boos. That is what my division
placed as the value of this company. /owever, a year and a half later, various
irregularities and inconsistencies made us write down goodwill to -ero= The
company did not have any real value to it. Interesting isn(t it0 >ut it can really
happen anytime, anywhere.
Everyone that has a business has fe! assets
3es, everyone does. &ven if you have a home o?ce with a des, a chair and a
computer, you have $%ed assets. 3our te%tboo calls these assets !plant#, but I
don(t wor in manufacturing, and I feel more comfortable in using the term !$%ed#.
'hat are the general categories of $%ed assets0 The following is a general list of
what you may see on a balance sheet,
;urniture @ ;i%tures
Computer /ardware @ Aoftware
Band
Band Improvements
>uilding
>uilding Improvements
Cachinery @ &5uipment
I(d lie to consider these $%ed assets major expenditures for your organi-ation.
This means that if the invoice to purchase an item is <1,000 or above it should be
recorded as a $%ed asset. The correct terminology in the business world would be to
capitalize this asset. 'hat e%actly do you capitali-e0 These would be all the costs
associated with putting the asset into use. This would include the invoice amount,
any shipping costs and installation charges. Cae sure that you have all this
information before you record your asset.
What is all this "uss about !e#reciation?
As soon as you capitali-e this asset, it will have to be depreciated. 'hat is
depreciation0 )epreciation goes along the lines of matching. As you use this $%ed
asset, normal wear and tear occur, and it will not stay brand new for long. 3ou must
e%pense a portion of this asset every year that you have it. Therefore, this e%pense
from use occurs at the same time revenue is generated in the same period.
+emember the matching principle from ACC DE10 'e are matching the use of the
asset that is associated with generating revenues for that same period. ;or
e%ample, you use the computer to generate invoicing to customers for sales.
Another e%ample would be the use of a piece of machinery that manufactures your
products.
What are the $etho!s o" !e#reciation?
A couple of popular depreciation methods are the straight-line $etho! and the
%ouble %eclining &etho!. >oth methods will depreciate the asset over its useful
life, but the double declining method will actually depreciate the asset at a greater
rate in the $rst few years of its life. In tandem with deciding what methodology to
use, please classify the life of your asset correctly= Actually the I+A has a great web
site, and if you search under !depreciation#, a publication boolet will come up and
they let you now how to distinguish a type of asset and what type of life span it
has. If you ever start preparing the records for $%ed assets, and need to depreciate
the assets, I highly recommend this web site. The following classi$cations and
useful lives were the ones I set up for my husband(s business,
Computer &5uipment. 2 years
;urniture @ ;i%tures. F years
&5uipment @ Cachinery. F years
Beasehold Improvements. either the length of the lease or D2 years usually dictate
this, whichever is shorter. 'e used 2 years for the business, because that is the
length of our lease.
The ne%t step is to determine what method to use. Boo at the life of the asset,
what you paid for the item and how long you feel it truly will last. If you feel you(ll
only get a few good years out of an asset, perhaps using the double declining
method would be more advantageous for you. /owever, it is really up to
management and what preferable method they currently use.
Conclusion
'e spoe brie:y about intangible assets, what are they and how they are recorded
on your balance sheet. Got all companies have intangible assets, but you should
now what they are. Another asset we discussed in this lecture was !$%ed# assets.
your computers, machinery @ e5uipment, buildings and leasehold improvements.
'e discussed how to record the asset on your boos and how to depreciate your
asset. I hope that in this lecture, you are developing the understanding of how
important these assets are to any business, and it is important to record them
correctly=