# Accounting for Assets

Business I · Accounting I · https://tryals.app/learn/business-i/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.

| Asset | Carried at | Rule |
| --- | --- | --- |
| **Cash** | Face value | Most liquid |
| **Receivables** | Expected collection | Minus **allowance for doubtful debts** |
| **Inventory** | **Lower of cost or NRV** | Write down if market drops |
| **PP&E** | Cost minus depreciation | **Historical cost** base |

**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**.

## Practice questions

7 of this lesson's 12 practice questions, with answers. The full set is in the app.

### 1. Under the conservatism principle, gains should be anticipated and recognised early.

**Answer:** False

**Why:** Conservatism says anticipate losses, never gains. Recognise losses as soon as they are probable; recognise gains only when they are realized. This asymmetry keeps the balance sheet from overstating the firm's position.

Page: https://tryals.app/practice/business-i/accounting-for-assets/under-the-conservatism-principle-gains-should-be-anticipated-and

### 2. Complete the depreciation formula.

**Answer:** Straight-line depreciation equals cost minus **salvage** divided by useful **life**.

**Why:** $(Cost - Salvage) / Life$, the formula that converts a purchase into a per-period expense.

Page: https://tryals.app/practice/business-i/accounting-for-assets/complete-the-depreciation-formula

### 3. Net book value is cost minus accumulated depreciation, and net realisable value is what the asset would fetch. Why are these routinely different?

A. Because NRV includes inflation and NBV does not
B. Because depreciation schedules are designed to track market value closely
C. Because NBV allocates cost and NRV estimates the market
D. Because NBV is used for tax and NRV for financial reporting

**Answer:** C. Because NBV allocates cost and NRV estimates the market

**Why:** Depreciation allocates cost; it does not appraise. That is why impairment testing exists, when NRV falls decisively below NBV, the allocation has stopped describing anything real.

Page: https://tryals.app/practice/business-i/accounting-for-assets/net-book-value-is-cost-minus-accumulated-depreciation-and-net

### 4. The current/non-current split turns on one year, which seems arbitrary. What does the boundary actually serve?

A. Tax treatment, which differs on either side of the boundary
B. Depreciation, which applies only to non-current assets
C. Nothing substantive: it is a presentational convention
D. Liquidity assessment: what can be turned into cash soon

**Answer:** D. Liquidity assessment: what can be turned into cash soon

**Why:** The classification exists to make short-term solvency visible. This is why the current ratio compares current assets with current liabilities and not totals.

Page: https://tryals.app/practice/business-i/accounting-for-assets/the-current-non-current-split-turns-on-one-year-which-seems

### 5. Match each depreciation method to its pattern.

**Answer:**

- Straight-line → Equal charge every year
- Declining balance → Higher charge early, lower later
- Units of production → Charge proportional to output
- Impairment → Write-down when value drops below book

**Why:** Three methods allocate cost over time; impairment recognises sudden loss. The choice should reflect how the asset delivers benefit, evenly, front-loaded, or per unit.

Page: https://tryals.app/practice/business-i/accounting-for-assets/match-each-depreciation-method-to-its-pattern

### 6. A fully depreciated machine still produces daily. What does its zero book value actually mean?

A. That the machine has no remaining economic value and should be scrapped
B. That the original useful-life estimate was correct
C. That its cost has been fully allocated to past periods
D. That the machine has been written off as impaired

**Answer:** C. That its cost has been fully allocated to past periods

**Why:** Depreciation spreads a historical cost across the periods that benefit from it, so book value is an allocation residue rather than a valuation. A zero balance and a productive machine simply mean the estimate was conservative, and it is why analysts compare book value with replacement cost rather than trusting either alone.

Page: https://tryals.app/practice/business-i/accounting-for-assets/a-fully-depreciated-machine-still-produces-daily-what-does-its-zero

### 7. Which are intangible assets?

A. Goodwill from an acquisition
B. Brand recognition and trademarks
C. A delivery truck
D. A patent on a manufacturing process

**Answer:** A. Goodwill from an acquisition; B. Brand recognition and trademarks; D. A patent on a manufacturing process

**Why:** Patents, trademarks, and goodwill have no physical substance, they are intangible. A truck you can kick is tangible PP&E.

Page: https://tryals.app/practice/business-i/accounting-for-assets/which-are-intangible-assets