Long-Term Operating Assets: Acquisition & Uses

Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology and is holds certifications as a CIA, CISA, CFSA, and CPA, CA.

The acquisition of long-term operating assets represents a significant investment by a company and these assets are used by companies to generate revenue over a number of years.

Long-Term Operating Assets

The Dog Games R Us Company is in the process of constructing a new building to house its operations and is considering the purchase of new, state-of-the-art pieces of machinery that will allow it to make dog games using less plastic. The owner of the business, Mr. I. M. Shaggy wants to learn all he can about long-term operating assets before committing the company to this purchase.

An asset is something of value that a business owns. Assets can be classified as either current or long-term. To be considered long-term, assets must provide future benefit to a business for more than the next 365 days or the current year, will be used in the business, and are not purchased with the intention of selling them to consumers.

Operating assets are acquired to produce income for a business. Long-term operating assets are classified as tangible or intangible. Tangible assets have physical substance, and intangible assets are those that cannot be touched or felt. Examples of tangible assets include property, plant, and equipment and natural resources. A patent is an example of an intangible asset. A patent granted by a government authority provides an inventor with the exclusive right to use, produce, or sell his or her invention for a specified period of time.

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Tangible Assets

Let's look at a few more examples of tangible assets.

Property, Plant, and Equipment

This category of tangible assets includes items like machinery, equipment, buildings, company vehicles, and land. All of these assets, except for land, get used up as they are being used to generate revenue for the company.

In order to satisfy the matching principle, the cost of using the asset must be recorded in the same financial period as the revenue that it helped to earn. In accounting, the process of allocating the cost of property, plant, and equipment assets as they are used to earn revenue is known as depreciation. Land is not subject to depreciation as it has an infinite life and its cost cannot be allocated to a particular time period.

When a company acquires an asset, the amount it records on the balance sheet (which summarizes assets, liabilities, and shareholders' equity) is known as historical cost. Historical cost reflects purchase price of the asset plus all costs incurred to get the asset ready for its intended use. In the case of the Dog Games R Us Company, the cost of the new building would include architectural fees for the drawings, the cost of building permits and the cost to construct the new building. If Dog Games R Us decides to purchase the new equipment, the cost could include transportation charges to get the piece of equipment to the company's premises, costs incurred to upgrade wiring to accommodate the new piece of machinery, and the costs incurred to build a base for the new piece of equipment to rest on in the factory.

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