Focus: Capitalization vs. expense, depreciation methods, asset disposals.
Key Responsibility: Maintain a fixed asset register and depreciation schedules.
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Week 10 introduces fixed assets (property, plant, and equipment) and how their cost is allocated over time using depreciation. Students learn when to capitalize versus expense purchases, how to record asset acquisitions, maintain a fixed asset register, calculate depreciation using multiple methods, and account for asset disposals.
By the end of this week, students will be able to:
Fixed assets (also known as property, plant, and equipment or PP&E) are long-term items that provide economic benefit for more than one year and are not purchased for resale.
Examples:
These assets are recorded on the balance sheet and depreciated over their useful life. Bookkeepers help record acquisitions, track locations, and support physical verification and audits.
Not all equipment or improvement costs are capitalized. Students learn to distinguish between:
Sample policy: Capitalize items costing more than 2,500 with a useful life greater than one year; expense all items at or below 2,500.
Students practice classifying expenditures as expense or capital based on policy and asset characteristics.
A fixed asset register is the detailed listing of each asset, used to track cost, location, depreciation, and net book value.
| Field | Description |
|---|---|
| Asset ID | Unique identifier or tag number. |
| Description | Asset name (e.g., “Dell Server #3”). |
| Category | Equipment, furniture, vehicles, etc. |
| Location | Where the asset is used or stored. |
| Purchase Date | Date the asset was acquired. |
| Cost | Capitalized amount (including taxes, freight, installation). |
| Useful Life | Expected life in years or units of activity. |
| Salvage Value | Estimated value at the end of its life (if applicable). |
| Depreciation Method | Straight-line, declining balance, or units-of-production. |
| Accumulated Depreciation | Total depreciation recorded to date. |
| Net Book Value | Cost minus accumulated depreciation. |
Example 1: Purchase with cash
Company buys machinery for 10,000 cash.
Fixed Assets — Machinery ................. Dr 10,000
Cash ......................................... 10,000
Example 2: Purchase financed with a note
Fixed Assets — Machinery ................. Dr 10,000
Notes Payable ................................ 10,000
If the company pays sales tax, shipping, or installation costs that are directly related to getting the asset ready for use, those amounts are added to the capitalized cost.
Depreciation is the systematic allocation of an asset’s cost over its useful life. It reflects wear and tear and obsolescence, but it is a non-cash expense.
Key ideas:
Depreciation expense is the same each year:
(Cost − Salvage value) ÷ Useful life
Example: Cost = 10,000, Salvage = 1,000, Life = 5 years
Accelerated method that uses a constant rate applied to book value.
Rate = 2 ÷ Useful life
Example: Cost = 10,000, Life = 5 years
Depreciation continues each year until the asset reaches salvage value.
Depreciation based on usage, such as units produced or miles driven.
Rate per unit = (Cost − Salvage) ÷ Total estimated units
Depreciation = Units this period × Rate per unit
Students complete sample schedules using estimated total units and actual usage each period.
Example: Straight-line depreciation of 1,800 for the year.
Depreciation Expense ..................... Dr 1,800
Accumulated Depreciation — Machinery ....... 1,800
Students see how depreciation increases expense, increases accumulated depreciation, and lowers net book value without affecting cash.
Disposing of an asset involves:
Asset cost: 10,000
Accumulated depreciation: 8,000
Book value: 2,000
Proceeds from sale: 3,000
Gain on sale: 3,000 − 2,000 = 1,000
Cash ..................................... Dr 3,000
Accumulated Depreciation ................. Dr 8,000
Fixed Assets — Equipment .................... 10,000
Gain on Sale of Asset ........................ 1,000
Students will also work through examples with losses and retirements with no proceeds.
Students learn to reconcile the fixed asset and accumulated depreciation accounts between the general ledger and the fixed asset register.
Typical reconciliation:
Differences must be investigated and corrected to ensure that the register and ledger match.
Students review a list of expenditures (e.g., new laptops, minor repairs, new roof) and determine which should be expensed and which should be capitalized based on a sample policy.
Using sample assets, students calculate annual depreciation under straight-line, double-declining balance, and units-of-production methods.
Students are given a list of assets with purchase dates and costs and must build a fixed asset register with categories, useful lives, and depreciation methods.
Students record journal entries for asset sales (with gains or losses) and retirements, ensuring that cost and accumulated depreciation are removed correctly.
Why is it important for organizations to distinguish between expenses and capitalized assets? How does this decision affect reported net income, taxes, and the appearance of the financial statements?
Week 10 gives students a solid foundation in fixed assets and depreciation. By learning when to capitalize a cost, how to compute and record depreciation, and how to handle asset disposals, students are prepared to maintain a fixed asset register and support accurate long-term financial reporting.
In more advanced courses, these concepts can be extended to tax depreciation rules, component depreciation, and asset impairment testing.