Question

Property, Plant & Equipment is considered a long-term asset, and it is capitalized over a period of time. Discuss what capitalization means, how depreciation is calculated and how the accounts are linked between the Balance Sheet and Income Statement to report depreciation activity.

Answer 1

Capitalization of an asset means that the the item is recorded as an asset and shown in the Balance sheet, rather than showing it as an expense in Income statement. The items which are capitalized are for long-term use and generally there carrying value is diminished as time passes this diminishing of the value of the capitalized items or Fixed Asset is known as Depreciation which can be occured due to normal wear and tear or passage of time or obsolence.

Depreciation expenses can be calculated by various method, the most common of which are Straight-Line metod, Units of Activity method, Declining balance method or sum of digit method. The Depreciation expenses are calculated over the life of the asset and the expense is charged to Income statement.

The Depreciation expense is shown in the Income statement and the Accumulated over the period of life of asset and the Accumulated Depreciation is shown in the balance sheet as a contra entry by deducting the same from the cost of the Asset