Accounting for Assets

Counting What You Own

Assets are resources the firm controls with expected future benefit. Accounting's job is to measure them honestly. Current assets cycle within the operating period, while non-current assets serve for years.

Pitfall: Overstating receivables overstates both assets and profit. Under conservatism, anticipate losses immediately (write inventory down), but never anticipate gains.

Allocating Asset Costs

Depreciation is not market-value decline; it is cost allocation, spreading asset cost over the periods that benefit.

• Straight-line: $\frac{\text{Cost} - \text{Salvage}}{\text{Useful life}}$
• Declining balance: $\text{Book value} \times \text{rate}$

Straight-line is simple and stable. Declining balance charges more in early years, matching assets that lose productivity faster when young.

Net book value $= \text{Cost} - \text{Accumulated depreciation}$. It is an accounting residual, not a market price. A machine with zero book value can still run perfectly. Intangibles like patents use amortization, while goodwill is tested annually for impairment.