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Financial Reporting of Long Term Assets

Financial Reporting of Long Term Assets

Author: Evan McLaughlin

In this tutorial, the student will learn about financial reporting of long term assets.

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"Financial Reporting of Long Term Assets"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792

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[MUSIC PLAYING] Hey, everyone, and welcome to our video today, Financial Reporting of Long Term Assets. So what's today's video about? Well, today we're going to talk about financial reporting of long term assets.

We're going to discuss reporting both assets and depreciation. We're going to look at the concept of carrying value. And then we're going to finish up with looking at recording entries for depreciation, as well as accumulated depreciation. So let's get started with the discussion of reporting assets and depreciation.

So assets are reported at their full book value. Now what's that book value concept? That's the cost of the depreciable asset less its accumulated depreciation.

So our assets are reported at full book value. We record the asset and the accumulated depreciation separately. OK, so our asset is going to be recorded separately from the accumulated depreciation associated with that asset.

Now what's accumulated depreciation? That's the total depreciation expense that's recorded to date in an asset's life. And on the Balance Sheet, it's reported directly below the related asset. So that leads us into reporting.

So when reporting, we're going to be reporting fixed assets, which is equivalent to capital assets and long term assets. So these terms can be used interchangeably, fixed assets, capital assets, long term assets. And long term assets are assets that will be used for longer than one year, such as plant assets, and long term investments.

And these assets are reported under the Asset section of the Balance Sheet or Long Term Assets section of the Balance Sheet. And again, each fixed asset has its own Accumulated Depreciation line. So that's a general discussion of reporting our assets and depreciation. Now, let's look at carrying value.

So what is carrying value? It's the book value of an asset, which is cost, less accumulated depreciation. So the book value of an asset cost, less accumulated depreciation. Carrying value is also referred to as book value. So those are synonymous terms.

The carrying value includes the cost of the asset and the cost of getting it ready for use. These can be things to include, such as purchase price, fees, installation costs, et cetera. And the book value also factors in accumulated depreciation, which you'll see there in that definition of carrying value, so cost less accumulated depreciation.

So what's the formula for calculating carrying value? Well, carrying value equals our asset cost, which you'll see there, the cost of the asset and the cost of getting it ready for use, minus accumulated depreciation. So that's how we would calculate our carrying value of our assets.

Now, let's turn our attention to recording a journal entry related to our long term assets. Depreciation, what is depreciation? It's the process of cost allocation to expense of a plant asset over its useful life. And you calculate it using the chosen method that the business has chosen, whether that's straight line depreciation or accelerated depreciation.

And now, the journal entry. So what's the journal entry to record depreciation? Well, you would debit Depreciation Expense and credit Accumulated Depreciation for that specific asset. So Depreciation Expense is included on the Income Statement. So let's go ahead and take a look at where we can find Depreciation Expense on an Income Statement.

So what we have here is just a sample Income Statement, Company ABC. We have our Sales section, Net Sales. And then, if we focus in on that Operating Expenses section of our Income Statement, you'll see there that we have Depreciation Expense, in this case, Depreciation Expense, Buildings. So depreciation expense is reported directly on the Income Statement as a separate line item. So that's where the Income Statement comes into play with depreciation.

And now, accumulated depreciation. That's the total depreciation expense recorded to date in an asset's life. And now accumulated depreciation is included on the Balance Sheet. And on the Balance Sheet, we include the cost of the asset, as well as the carrying value, which again, is that cost minus the accumulated depreciation.

So let's go ahead and take a look just at an example Balance Sheet of where we'll see accumulated depreciation. So we have a sample Balance Sheet here. Again, we start with our assets, liabilities, and equity.

If we look at the Assets section, focus in on that Long Term Assets section, we'll see that we have Accumulated Depreciation, Buildings, OK? So you'll see right above that line, we have our buildings. So we report the asset at its cost.

And then, directly below that, we would report that accumulated depreciation for that asset. So that's what accumulated depreciation is going to look like on a Balance Sheet, directly below the asset that relates to. So that's a discussion of recording depreciation expense and accumulated depreciation and where those two items show up in our financial statements.

So let's summarize what we talked about today. In a nutshell, today was all about reporting long term assets. They're reported at their carrying value. And we talked about depreciation and how that shows up on the Income Statement. And we also talked about accumulated depreciation and how that shows up on our Balance Sheet.

I hope everybody enjoyed this video. And I hope to see you next time.

Notes on "Financial Reporting of Long Term Assets"

Terms to Know

Carrying Value

The book value of an asset, cost less accumulated depreciation.