Fixed assets refer to tangible assets held by an enterprise for the production of goods, provision of services, leasing or operation and management, and have a useful life of more than one fiscal year. Fixed assets are one of the important assets of an enterprise, and the selection and use of its accounting methods have an important impact on the financial status and operating results of the enterprise. The accounting methods of fixed assets mainly include historical cost method, replacement cost method, fair value method, present value method and workload method. This article will take you to understand these 5 methods of fixed asset accounting.
The historical costing method is a method of accounting based on the actual cost of fixed assets. When an enterprise purchases or constructs fixed assets on its own, the actual purchase price, relevant taxes, transportation costs, loading and unloading fees and other related expenses shall be regarded as the recorded value of fixed assets. In subsequent use, the depreciation of a fixed asset is calculated at its original cost.
The historical cost method is an important basis for asset valuation based on the book value of current assets in accounting records, also known as the "net book value method". It is calculated as follows:
Appraisal value of current assets = book value of current assets - impairment factor.The main advantage of historical costing is that it is objective and verifiable because it is evaluated based on historical costs that have already occurred. Additionally, the historical cost approach is particularly useful when valuing tangible assets, which typically have a relatively stable market value.
However, there are also some drawbacks to the historical costing method. First, it ignores the impact of market** movements and therefore may not reflect the current market value of the asset. Second, the historical cost approach may not take into account the future earnings and cash flows of an asset, which may be more important when valuing intangible assets.
Overall, the historical costing method is a relatively simple and objective valuation method that is suitable for the valuation of tangible assets. However, other valuation methods may need to be used in the context of valuing intangible assets or taking into account market movements.
The replacement cost method is a method of accounting based on the replacement cost of fixed assets. Replacement cost is the amount of cash or cash equivalents that a business needs to pay to reacquire the same or similar assets. When adopting the replacement cost method, companies need to understand the market and related asset information to determine the replacement cost of fixed assets.
The replacement cost method is calculated as:
Appraised Value = Replacement Cost Physical Depreciation Functional Depreciation Economic Depreciation, which can also be expressed as: Appraisal Value = Replacement Full Price Renewal Rate.Replacement cost refers to the total cost of repurchasing a new asset or remanufacturing a completely new product under current market conditions. Physical depreciation refers to the decrease in the value of an asset due to the different degrees of physical use in the process of use. Functional depreciation refers to the loss of value caused by the relative backwardness of the function of assets due to technological progress and other reasons. Economic depreciation refers to the decline in the value of assets due to changes in the external environment, such as declining demand and policy adjustments.
The fair value method is a method of accounting according to the fair value of fixed assets. Fair value is the amount of money that a market participant would have to pay for an asset to receive or transfer a liability in an orderly transaction that occurred on the measurement date. When using the fair value method, companies need to understand the market and related asset information to determine the fair value of fixed assets.
The present value method is a method of accounting based on the present value of future cash flows of fixed assets. Present value refers to the discounted value of future cash flows and is often used to calculate the present value of an asset. When using the present value method, companies need to understand the choice of future cash flows** and the discount rate to determine the present value of fixed assets.
The workload method is a method of accounting according to the actual workload of fixed assets. Workload usually refers to the number of hours or output of a fixed asset during its use. When adopting the workload method, a business needs to calculate the depreciation amount of fixed assets based on their usage and workload.
Different accounting methods will have different impacts on a company's financial position and operating results. Enterprises should choose appropriate accounting methods according to their actual situation and relevant regulatory requirements, and maintain consistency to improve the quality and comparability of accounting information.