Generally accepted accounting principles -- or GAAP -- provide guidance on how to account for fixed assets, especially when it comes to long-term strategic management and operational efficiency. GAAP rules for fixed assets run the gamut from depreciation and write-down to bookkeeping and financial reporting. Also known as capital assets or tangible resources, fixed assets include commercial establishments, residential settings, computer gear and equipment.
Under American GAAP and international financial reporting standards, a company must depreciate fixed assets to match revenue the resources bring in corporate coffers. Depreciating an asset means spreading its value over several years, the exact number of which depends on the underlying resource and the allocation regime the corporate owner chooses. To depreciate a resource, a business may choose a straight-line method or an accelerated method. Under straight-line cost allocation -- the other name for depreciation -- a company spreads the same asset value every year. The accelerated depreciation method calls for a higher expense allocation in earlier years and lower amounts in later periods.
Depreciation, in essence, is a type of gradual asset write-off, but there are instances that call for the outright write-down of a fixed asset. For example, if technological advance in an industry -- such as the launch of state-of-the-art machinery – has rendered production equipment stale, the corporate owner may need to bring down the resource’s value in its records. In a financial glossary, “write-off,” “write-down” and “charge-off” are identical terms, and all lead to operating losses.
GAAP rules for fixed assets emphasize the need to debit and credit the right accounts when recording assets’ economic events, an identical term for transactional data. To record a fixed-resource purchase, a corporate bookkeeper debits the “property, plant and equipment” master account, as terms are noted, and credits the vendor payables account. If the transaction is a cash purchase, the bookkeeper credits the cash account. Don’t mistake an accounting entry for a banking credit. When finance people credit cash -- an asset account -- they’re reducing company money. The entry for asset depreciation is as follows: debit the depreciation expense account, and credit the accumulated depreciation account.
Transactions affecting tangible assets create numerical information that spills into various financial statements. Fixed asset purchases increase a company’s balance sheet, also known as a report on financial condition. Assets and accumulated depreciation are integral to the last data synopsis. Depreciation expense makes it into a statement of profit and loss, which ultimately feeds into a statement of changes in shareholders’ equity.
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.