Financial Accounting: In an Economic Context

SUMMARY OF KEY POINTS

How the matching principle underlies the methods used to account for long-lived assets.

Long-lived assets are used in the operations of the business, providing benefits that extend beyond the current accounting period. Included are land (not held for resale), buildings, machinery, equipment, costs incurred to acquire the right to extract natural resources, and intangible assets.

According to the matching principle, efforts (expenses) should be matched against benefits (revenues) in the period when the benefits are recognized. Since the benefits provided by longlived assets extend beyond the current period, the costs of acquiring long-lived assets are capitalized in the period of acquisition and then amortized as their useful lives expire.

Major questions that are addressed when accounting for long-lived assets and how the financial statements are affected.

Accounting for most long-lived assets consists primarily of answering three questions: (1) What dollar amount should be included in the capitalized cost of the long-lived asset? (2) Over what time period should this cost be amortized? (3) At what rate should this cost be amortized? These questions are addressed for all long-lived assets except land and goodwill, which is not subject to amortization.

Answering ...