Long-terms assets are assets which a company plans to hold for more than one year. Typically, when we think of long-term assets, we think of buildings, land and equipment. Long-term assets also include intangible assets, like patents, trademarks and copyrights.

Assets are typically assigned to accounts based on the type of asset. Vehicles are separated from buildings. Land is separated both of these. It is important to note that buildings and land do not go in the same account, which means when a building is purchased on a piece of land, the costs of these items must be individually allocated into their separate accounts.

Acquiring Assets

When a business acquires an asset, that asset must be recorded at cost. All costs associated with acquiring the asset and getting it ready to use should be considered as part of the cost of an asset. Remember that an asset is something the company owns or has the right to, which can be used to generate revenue. If the company purchases a piece of machinery but in order to use it, the company must have it delivered and installed, those costs should be included in the cost of the asset. Other costs that might be considered part of the asset include legal and closing costs, appraisal fees, transportation, upgrades and even repairs in cases where the machine isn’t working at the time of purchase.

To record assets, debit the asset account (Buildings, Land, Equipment, Vehicles, etc.) and credit the methods of payment, which are generally Cash, Notes Payable or a combination of the two. Note that these entries are regular journal entries and should be recorded at the time of purchase.

Allocating the Purchase Price Among Several Assets

When a business purchases a building, the company is not just acquiring a building. Many times we forget that the purchase includes land, improvements to the land (driveways, sidewalks, etc.), light fixtures and climate control systems inside the building. There might also be equipment or furniture included in the deal. Why is this important?

As assets are used up, they must be depreciated. This also allows the company to recover the cost of those assets. The matching principle states that expenses must be matched with the revenue they help generate. Companies use assets to generate revenue, therefore, a portion of the cost must be expensed.

Not all assets are used up at the same rate. The useful life of a building is much longer than the useful life of the carpets in the building. Land has an indefinite life, but  land improvements have a definite life that is probably shorter than the building on that land. Because all these items have different lives and will be replaced at different times, the costs associated with those pieces of the purchase need to be split up and properly categorized.

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Matching principle is the accounting principle that requires that the expenses incurred during a per... View the full answer