Fixed Assets Explained: Depreciation, Valuation, and Compliance with U.S. Standards

Fixed Assets: Understanding Depreciation and Asset Valuation in U.S. Accounting

Introduction

Fixed assets play a crucial role in financial reporting. Understanding how assets are depreciated and valued under U.S. GAAP is essential for accurate financial statements and informed decision-making.

What Are Fixed Assets?

Fixed assets are long-term tangible property used in the operation of a business, such as land, buildings, machinery, and equipment. They are not intended for sale in the normal course of business but are used to generate income over time.

Depreciation of Fixed Assets

Depreciation represents the systematic allocation of the cost of a fixed asset over its useful life. Under U.S. GAAP, businesses commonly use methods such as:

  • Straight-Line Depreciation: Even allocation over the asset’s useful life.
  • Double Declining Balance: Accelerated depreciation, more in the early years.
  • Units of Production: Based on actual usage or production output.

Asset Valuation

Under U.S. GAAP, fixed assets are generally recorded at historical cost and are not revalued upward. Adjustments are only made for impairments when the asset’s carrying amount exceeds its recoverable amount.

Key Points to Remember

  • Depreciation expenses impact the income statement and tax calculations.
  • Land is not depreciated.
  • Impairments must be recognized promptly under applicable accounting standards.

Conclusion

Accurate depreciation and valuation of fixed assets are vital for reliable financial reporting. Understanding these concepts ensures compliance with accounting standards and better financial management.

— Global Accounting & U.S. Tax Practical Guide Team

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Depreciation Methods Compared: Straight-Line vs Double Declining Balance

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