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Fixed Asset, Intangible and Depreciation (Terms and Definitions)

This page contains terms and definitions for fixed asset, intangible depreciation and amortization.

  • Plant assets – Tangible resources that are used in the operations of the business and are not intended for sale to customers.
  • Property, plant, and equipment – Assets with relatively long useful lives and currently being used in operations.
  • Depreciation – The process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner.
  • Amortization – The allocation of the cost of an intangible asset to expense over its useful life in a systematic and rational manner.
  • Useful life – An estimate of the expected productive life (also called service life) of an asset.
  • Salvage value – An estimate of an asset’s value at the end of its useful life.
  • Straight-line method – Depreciation method in which periodic depreciation is the same for each year of the asset’s useful life.
  • Accelerated-depreciation method – Depreciation method that produces higher depreciation expense in the early years than in the later years.
  • Declining-balance method – Depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the useful life of the asset.
  • Units-of-activity method – Depreciation method in which useful life is expressed in terms of the total units of production or use expected from an asset.
  • Depreciable cost – The cost of a plant asset less its salvage value.
  • Additions and improvements – Costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.
  • Asset turnover ratio – A measure of how efficiently a company uses its assets to generate sales; calculated as net sales divided by average total assets.
  • Capital expenditures – Expenditures that increase the company’s investment in productive facilities.
  • Copyright – Exclusive grant from the federal government that allows the owner to reproduce and sell an artistic or published work.
  • Depletion – The allocation of the cost of a natural resource to expense in a rational and systematic manner over the resource’s useful life.
  • Franchise (license) – A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, provide specific services, or use certain trademarks or trade names, usually within a designated geographical area.
  • Going-concern assumption – States that the company will continue in operation for the foreseeable future.
  • Goodwill – The value of all favorable attributes that relate to a business enterprise.
  • Intangible assets – Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.
  • Licenses – Operating rights to use public property, granted to a business enterprise by a governmental agency.
  • Materiality principle – If an item would not make a difference in decision making, a company does not have to follow GAAP in reporting it.
  • Natural resources – Assets that consist of standing timber and underground deposits of oil, gas, or minerals.
  • Ordinary repairs – Expenditures to maintain the operating efficiency and productive life of the unit.
  • Patent – An exclusive right issued by government’s Patent Office that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.
  • Research and development (R&D) costs – Expenditures that may lead to patents, copyrights, new processes, or new products.
  • Revenue expenditures – Expenditures that are immediately charged against revenues as an expense.
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