Question

Which assets are depreciated, amortized and capitalized? How does an organization know how many years and the amount to depreciate, amortized, and capitalized? What are examples of each?

Answer 1

An asset is capitalized when it has a long-term use, generally, more than a year, so that it can be expensed (depreciated) over a longer period exactly as per its useful life.

Basic requirements for capitalization are as follows:

• The company must own the asset
• It should be used for the purpose of business
• The total useful life of the asset can be determined easily and must be more than one year

Examples are buildings, machinery, and vehicles etc.

Depreciation and Amortization is the method of systematically allocating the complete capital expenditure (less salvage value) over the useful life of an asset. It works on the matching concept of accounting where an expense is recorded when it has actually occurred. However, usage of an asset cannot be tracked easily, therefore, it is expensed proportionately over the useful life of the assets.

The useful life an asset is determined based on past experiences and also, various legislations provide predetermined useful lives for various assets. Sometimes, this also depends on the estimation of management based certain logical reasons. It depends on the user, frequency of its use, the condition of business environments, its regular repairs and additions.

The amount of depreciation and amortization is calculated as per the accounting standards and methods provided therein. Some of the generally followed methods are straight line method, written down value, MARC method, 200% down method etc.

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