The GAAP mainly relies on consistency of data conveyed by business financial records. Since historical methods does not depend on the speculated market prices, rather a real transaction that occurred, the cost is regarded as most reliable. For this reason, the historical cost principle is best used for reporting long-lived assets. It is the best method for reporting assets whose disposal may not be done in the near future. Examples of these assets include land, buildings, fixture, equipment and natural resources such as mineral deposits, oil wells and timber tracks. Under the historical cost principle, assets are recorded at acquisition cost as indicated on the balance sheet. In accounting for purchases of long-term assets, interest expense is subtracted from the original cost or cost of acquisition. The book value of long-term assets can be calculated by getting the accumulated depreciation subtracted from acquisition cost. To estimate an asset’s useful life, important variables such as acquisition cost, depreciation expense per year and salvage value should be determined. The following methods are used to estimate asset’s useful life; straight-line depreciation method, production method and double (declining) methods. Useful life can then be calculated as follows: Asset impairment Asset impairment refers to an abrupt deterioration in the usefulness of a long-term asset often caused by damage effects on the asset, obsolescence due to the ever-changing technology or a change in the county’s laws prohibiting the use of an asset. It occurs when the future benefit of an asset known as market value is below the recorded book value (cost-accumulated depreciation). When impairment occurs, the current market value of the asset should be written down and a loss recognized. First, long-lived assets are selected for purposes of performing impairment testing as well as establishing the net book value. Secondly, determine the level of impairment by finding the total undiscounted cash flows expected from the selected assets. The net book and the undiscounted cash flow figures are then compared with intent of establishing which of the values have higher figures. If the net book value is higher than the undiscounted cash flow value, then the amount of variance is determined and recorded. Common Asset Depreciation Methods Depreciation refers to two main concepts; i. Diminished value of assets also called fair value This principle or concept has an impact on the balance sheet of a firm or a business entity. ii. Depreciation with corresponding principle, which is the allocation of the asset cost to periods upon which that particular asset is in use. This affects the net gain of reported assets. It is worth noting that when computing depreciation using a particular method, the cost of an asset is allocated to that period the use of an asset covers or is used. The expense is vital for purposes of financial reporting and taxation. In choosing a suitable method of computing depreciation, value of assets, the type and periods upon which the asset is used is important. These computing methods are specified in laws and statutes or accounting standards that vary from one country to another. It is important to note that some depreciation computing methods exists, but the common methods include; fixed percentage depreciation method, straight-line computing method and declining balance. It is also
Historical cost principle, asset impairment and depreciation Name Institution How historical cost principle is used to account for long-lived assets Historical cost principle values assets at the original cost of acquisition. The concept takes into consideration the purchasing cost of an asset…
1). Other alternatives such as current cost, replacement cost, purchasing power, net present value or fair value accounting are proposed. While blanket statements like “Historical cost accounting is meaningless in today's complex business environment” are inherently devoid of content, it is certainly true that historical cost accounting is no longer the preferred technique.
The growing business of prison management has been heavy on the public interest financially. Thus, there is need to cut down the cost and overcrowding in the prisons along with maintaining the system of justice. Overcrowding can be reduced by addressing the issue that is responsible for so many people going into and remaining in the prison every year.
Raising capitals is also considered as a form of investment because when you invest on something, you have to release a capital or you have to capitalize on your investment. But just like the other factors, capital has a cost. This cost is equal to the marginal investor’s required return on the security in question (Brigham, Houston, & Clark, 2004).
Accounting Principles Answer (A) Budget in any corporate entity serves several purposes and those can be described as per the following. a) It is an instrument to plan and deploy the resources to achieve the short-term and long-term goals of any organization.
One of the most distinguished differences between these two lies in their definitions. While historic cost is the amount at which the asset or liability was originally obtained, fairvalue is the amount at which the asset could be exchanged or a liability settled between knowledgeable, willing parties in an arms length transaction.
to accounting using asset values based on the actual amount of money paid for the asset with no inflation adjustment while fairvalue accounting refers to the value of an asset or liability using an arms length transaction between unrelated,
At stage 2, the firm and the merchant banker would reevaluate the firm’s decisions and terms of working for the investment banker and set the price. Stage 1 decisions determine the direction of fund raising, which gets
Nikolai, 2009). This principle deals with the revenue and expenses and in practice it does not permit the management to soften the results by deferring expenses to next year.
Prepaid expenses represent those expenses paid
But after the financial crisis, the opponents of the Fair Value Accounting method pointed out that the fair value accounting method was one of the main factors which intensely fuelled the financial crisis. On the
9 pages (2250 words)Essay
Hire a pro to write a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Apply my DISCOUNT
Got a tricky question? Receive an answer from students like you!Try us!
Let us find you another Essay on topic Explain why the historical cost principle is used to account for long-lived assets and how the cost basis is determined. Discuss for FREE!