Chapter 1.22® - Glossary of Capital Assets, Amortization, Disposal, Sale & Exchange of Capital Asset Terminology
Accelerated Amortization Method – An amortization method that charges a larger expense to amortization during a capital asset’s early years, and smaller amounts in later years.
Amortization – Process of allocating cost of a capital asset to amortization expense over the asset’s estimated useful life.
Betterment – An expense incurred to make a capital asset more productive, efficient or useful or to extend its useful life. Betterment is also known as an improvement and is debited to the Capital asset account.
Book Value – Original cost of a Capital asset less its Accumulated Amortization
Capital Asset – Tangible and intangible assets that are used in the business operations of a company, are expected to last more than 1 accounting period and help generate revenues for the organization. Capital assets do not include goodwill.
Capital Expenses – Cost of capital assets that provide value-added material benefits beyond the current accounting period and for the longer term. These expenses are Debited to the Capital asset account and reported on the balance sheet.
Change in an Accounting Estimate – A change in an account’s final balance due to new information being released, better insight/research, improved judgement or additional developments. For example, if the estimated salvage value or useful life of a capital asset changes, we use the new estimate to calculate revised amortization for current and future periods.
Copyright – Copyright is an intangible asset that gives the owner the exclusive rights to publish/sell a particular product, literary or art work during his/her lifetime + additional 50 years.
Declining-balance Amortization - Also known as an accelerated amortization method, the declining balance amortizes larger shares of expense in the early years of an asset’s life (up to double) and smaller expenses in later years.
Depletion – Process of allocating cost of natural resources to the periods in which they are consumed; this is the same as amortization of natural resources.
Depreciation – The American term used to describe amortization.
Fixed Assets - Property, plant and equipment including assets such as land, buildings, equipment, machinery, leasehold improvements and natural resources.
Goodwill - Goodwill is a capital intangible asset and is the amount by which the price paid for a company exceeds the fair market value of the company’s net assets (assets – liabilities). Goodwill means the company has other useful ‘assets’ that cannot be measured on the Balance sheet, and they include superior senior management, skilled people, brand names such as Coca Cola, excellent business locations/head office location, superior quality products & services, good customer & public relations, etc.
Half-Year Rule – A method of calculating
amortization for partial periods by taking 6 months worth of amortization,
regardless of when the capital asset was purchased or disposed of.
Inadequacy – A condition when the company’s capital assets are not productive or strong enough to meet its business needs.
Intangible Assets - Intangible assets lack physical substance and include assets such as patents, leaseholds, copyrights and trademarks. A very popular example of a trademark is Coca Cola. Goodwill is also an intangible asset but it is shown separately on the balance sheet from Capital Assets.
Land Improvements - Land improvements such as driveways, parking lots, lighting systems, parking space white lines, etc are subject to amortization. Since these costs increase the usefulness of the land, they are charged to a separate asset account known as Land Improvements.
Lease - A lease is when a building or property is rented under a contractual agreement where the property owner grants the lease and is called the Lessor.
Lessee - The person who secures the right to possess and use the property is called the Lessee.
Leasehold Improvements - Over the life of the lease, the lessee is sometimes required to pay for useful leasehold improvements such as flooring, painting, storefronts, wall covers, etc. These value-added improvements to the building revert back to the Lessor at the end of the life of the lease. The costs of such improvements are Debited to the Leasehold Improvements account and amortized over their useful life.
Lump-Sum Purchase - Purchase of lump-sum Capital assets, also known as a basket purchase, is the purchase of capital assets in a group, with 1 single transaction and 1 lump-sum buying price.
Natural Resources - Natural resources are tangible capital assets that are physically consumed when used, and include assets such as oil and gas, gold & mineral deposits, timber, lumber, copper fields, etc. Because they are used up in production of other finished goods, they are known as ‘wasting assets.’
Obsolescence – Obsolescence is a condition where a particular capital asset is no longer competitive or productive enough to product goods & services like it used to. This can happen due to newer technology being released making the old ones obsolete, or higher demands from consumers for sophisticated products.
Patent – A patent is an exclusive right given to an innovator or designer to manufacture and sell a unique product or to use a process for 20 years. Patents are usually granted by the Federal Government and help the pioneer protect his product from illegitimate copies or piracy.
Property, Plant & Equipment – Tangible capital assets of an organization that are used in its operations and have a useful life of more than 1 accounting period. Property, plant & equipment are also known as ‘fixed assets.’
Revised Amortization – Recalculation of amortization expense due to a ‘change in accounting estimate’ that could be the salvage value, useful life or a change in purchase cost.
Salvage Value – Estimate of how much a capital asset could be sold for at the end of its useful life through a sale, trade-in allowance or disposition allowance. This estimate is done by management and is also known as a residual or scrap value.
Straight-Line Amortization - Straight-line amortization expenses the same amount to amortization expense each period over the useful life of the capital asset.
Trademark –A symbol, phrase, name or alias that identifies a company, its services/products or its workforce. For example, Coca Cola is a trademark that is worth billions of dollars.
Units-of-Production Amortization – If usage of a capital asset varies significantly from one period to the next, the best method to use is the Units of Production amortization method. Units of production method charges a varying amount to amortization expense each period; it is calculated in a 2 step process:
1) Subtract the asset’s salvage value from its total cost and divide the total number of units expected to be produced during asset’s useful life. This measurement can be done in hours, kilometres, grams, kilograms, or any other unit of measure, as long as it is consistent and measurable.
2) Calculate the amortization expense for each period by multiplying the # of units produced times the amortization rate / unit.
Useful Life – The estimated length of time a capital asset is expected to last or be used in a company’s operations before it becomes obsolete, dies, or wears out.