Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources Components of Asset Cost
Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Accounting Textbooks Boundless Accounting
Accounting Textbooks
Accounting
Concept Version 6
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Cost of Equipment

The cost of equipment is the item's purchase price, or historical cost, plus other initial costs related to acquisition and asset use.

Learning Objective

  • Describe how a company calculates the cost of a piece of equipment

Key Points

    • Fixed assets are long term items such as property plant or equipment.
    • Equipment is listed on the balance sheet at its historical cost amount, which is reduced by accumulated depreciation to arrive at a net carrying value or net book value.
    • Selling equipment triggers a gain or a loss, depending on the difference between the equipment's net book value and its sale price.

Terms

  • property, plant, and equipment

    an accounting term for certain fixed assets and property which will be used for a long period of time, such as land, machinery, and factories

  • International Accounting Standard

    accounting rules that are a part of IFRS (International Financial Reporting Standards), a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.

  • book value

    the value is based on the original cost of the asset less any depreciation, amortization or Impairment costs made against the asset.

Full Text

Equipment and Historical Cost

Fixed assets, also known as non-current or tangible assets, include property, plant, and equipment. Fixed assets, according to International Accounting Standard (IAS) 16, are long range assets whose cost can be measured reliably.

The equipment's cost is calculated by adding the item's purchase price, or historical cost, to the other costs related to acquiring the asset. These additional costs can include import duties and deductible trade discounts and rebates.

Historical cost also includes delivery and installation of the asset, as well as the dismantling and removal of the asset when it is no longer in service. Equipment is subject to depreciation. Depreciation is a periodic reduction in an asset's value. It is disclosed on the income statement and appears as a contra-asset account on the balance sheet.

The cost of equipment includes all costs paid to put the asset into use.

Equipment is listed in a separate section within the balance sheet.

Equipment and the Balance Sheet

Since accounting standards state that an asset should be carried at the net book value, equipment is listed on the balance sheet at its historical cost amount. The cost is then reduced by accumulated depreciation to arrive at a net carrying value or net book value. A company is free to decide what depreciation method to use on the equipment.

Sale of Equipment

When an equipment is sold, the sale of the asset can trigger a gain or a loss, depending on the difference between the equipment's net book value and its sale price. As with other assets, gain or losses on sales of equipment are disclosed on the income statement as a reduction or addition to income for the period.

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