Explain why the historical cost principle is used to account for Essay

Explain why the historical equal formula is employ to account for long-lived assets and how the cost basis is determined. Discuss - Essay ExampleThe GAAP mainly relies on consistency of data conveyed by business fiscal records. Since historical methods does not depend on the speculated market prices, rather a real transaction that occurred, the cost is regarded as most reliable. For this reason, the historical cost principle is best used for reporting long-lived assets. It is the best method for reporting assets whose disposal may not be done in the near future. Examples of these assets entangle land, buildings, fixture, equipment and natural resources such as mineral deposits, oil wells and timber tracks. Under the historical cost principle, assets are enter at acquisition cost as indicated on the balance sheet. In accounting for purchases of long-term assets, interest expense is subtracted from the original cost or cost of acquisition. The book value of long-term assets can b e calculated by getting the accumulated depreciation subtracted from acquisition cost. To estimate an assets useful conduct, important variables such as acquisition cost, depreciation expense per year and salvage value should be determined. The following methods are used to estimate assets useful life straight-line depreciation method, production method and double (declining) methods. Useful life can then be calculated as follows Asset scathe Asset impairment refers to an abrupt deterioration in the usefulness of a long-term asset often caused by damage effects on the asset, obsolescence due to the ever-changing applied science or a change in the countys laws prohibiting the use of an asset. It occurs when the future benefit of an asset known as market value is below the recorded book value (cost-accumulated depreciation). When impairment occurs, the current market value of the asset should be written down and a loss recognized. First, long-lived assets are selected for purposes of perform impairment testing as well as establishing the net book value. Secondly, determine the level of impairment by finding the total undiscounted interchange flows anticipate from the selected assets. The net book and the undiscounted cash flow figures are then compared with intent of establishing which of the values have higher figures. If the net book value is higher than the undiscounted cash flow value, then the amount of variance is determined and recorded. Common Asset Depreciation Methods Depreciation refers to two main concepts i. Diminished value of assets also called pretty value This principle or concept has an impact on the balance sheet of a firm or a business entity. ii. Depreciation with interchangeable principle, which is the allocation of the asset cost to periods upon which that situation asset is in use. This affects the net gain of reported assets. It is worth noting that when compute depreciation using a particular method, the cost of an asset is al located to that period the use of an asset covers or is used. The expense is vital for purposes of financial reporting and taxation. In choosing a suitable method of computing depreciation, value of assets, the type and periods upon which the asset is used is important. These computing methods are specified in laws and statutes or accounting standards that vary from one country to another. It is important to bring down that some depreciation computing methods exists, but the common methods include fixed percentage depreciation method, straight-line computing method and declining balance. It is also