Acquisition And Depreciation Of Long-Term Assets Are Importa

Acquisition And Depreciation Of Long Term Assets Are Important To Unde

Acquisition and depreciation of long-term assets are important to understand because these assets represent a business's largest investment of resources. Recording the correct cost for an asset can be difficult because there are many costs associated with the purchase or construction of tangible property, and there are many legal fees associated with the purchase of real property. After assets have been acquired or constructed, they can be depreciated over a period of time. Depreciation is not meant to show the decline in the value of property. Depreciation refers to how the asset is used or charged over a period of time—its useful life.

A company will record depreciation on the books in order to follow the generally accepted accounting principle (GAAP) matching principle. The matching principle occurs when expenses are matched to revenues. The revenue generated from the asset purchased is matched to depreciation expense.

Imagine that you own or work for a business as you discuss the following information in a two- to three-paragraph essay. Identify and describe your business (e.g., clothing store, landscaping business, delivery service, or restaurant). Provide two examples of long-term assets that the business owns. Classify the asset (i.e., building, equipment, furniture and fixtures, etc.). What depreciation method will you use to depreciate this asset? Explain why. How does depreciation affect the income statement and balance sheet? Explain how depreciation might affect your decisions to purchase expensive equipment or real estate. Support your content with at least one credible source.

Paper For Above instruction

For this discussion, I will assume the role of a landscaping business owner, "GreenScape Services," which specializes in residential and commercial landscape maintenance and installation. The company’s primary long-term assets include landscaping equipment and a commercial van. These assets are critical for daily operations and are classified as equipment and vehicles, respectively. The equipment includes items such as lawn mowers, trimmers, and planting tools, while the van is used for transporting staff and materials to job sites.

In terms of depreciation method, I would employ the straight-line method for both assets. This method evenly allocates the cost of the assets over their estimated useful lives, providing simplicity and consistency in expense recognition. The straight-line depreciation is suitable because landscaping equipment and vehicles typically have predictable useful lives and residual values. For example, I estimate the equipment’s useful life as five years and the vehicle’s as seven years, after which they will be replaced or upgraded. Choosing the straight-line method ensures a consistent expense pattern in the income statement, which aids in budgeting and financial planning.

Depreciation impacts both the income statement and balance sheet significantly. On the income statement, depreciation expense reduces net income, reflecting the wear and tear or obsolescence of assets over time. For example, a yearly depreciation expense of $10,000 for equipment will decrease the reported net income, providing a more accurate picture of the company's profitability. On the balance sheet, accumulated depreciation offsets the original asset cost, which reduces the book value of the assets. This process ensures that the valuation of assets reflects their current condition and economic usefulness. Proper depreciation accounting also plays a crucial role in tax planning, as depreciation expenses are deductible, reducing taxable income.

Regarding purchasing decisions, awareness of depreciation affects the company's approach to investment in costly assets. Knowing that equipment depreciates over time may influence the decision to acquire high-quality, durable machinery to maximize the asset’s lifespan and reduce replacement costs. Similarly, understanding the depreciation schedule of commercial real estate, often chosen for long-term strategic growth, guides financial planning and cash flow management. Moreover, companies might prefer lease arrangements over purchases or opt for newer models to maximize depreciation benefits and reduce maintenance costs. Overall, depreciation considerations are fundamental for strategic financial decision-making, capital budgeting, and ensuring the long-term profitability of the business.

References

• Arnaboldi, M. (2016). Strategic Accounting and Control in Condition of Uncertainty. Routledge.
• ACCA. (2020). Financial Accounting in Business. London: Association of Chartered Certified Accountants.
• Graham, L., & Turner, A. (2019). Understanding Business Finance. Routledge.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial Accounting (12th ed.). Wiley.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory and Analysis: Text and Cases. Wiley.
• IRS. (2021). Publication 946: How to Depreciate Property. Internal Revenue Service.
• Needles, B. E., & Powers, M. (2018). Financial Accounting. Cengage Learning.
• Heitzman, S., & Novotny-Farkas, S. (2019). Financial Reporting and Analysis. McGraw-Hill Education.
• Benston, G. J. (2011). Financial Accounting and Reporting. Harvard Business Review Press.
• Ossola, C. (2022). Business Asset Management Strategies. Journal of Asset Management, 23(4), 315-330.