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Free «Financial Accounting Discussion» UK Essay Paper

Free «Financial Accounting Discussion» UK Essay Paper

Capitalization of assets costs refers to those expenses that are normally incurred in financing fixed assets.  Labor expenses used during the process of building fixed assets are among the key examples of capitalization cost. Others include the likes of interest expenses that are normally incurred in the process of financing fixed asset construction (Anderson, 1995). These expenses are always capitalized to meet the accounting need or addition made to the total cost of assets. In fact no deductions are made from the revenue at the time when they are incurred but rather deductions are made on from the revenues through depletion, depreciation or amortization.

Depreciation methods include; declining balance, straight line and written down value methods. The three methods are based on time while another category is based on activity or use namely; group, units of production and composite depreciation. Of the all the methods employed in calculating depreciation, straight line method is the commonly used technique whereby salvage value is estimated by the company at the end of a period after which it is used in value generation (Diamond, 1995).

Depreciation affects financial statement by acting as a non cash expense hence can be used by accountants in tracking loss in the value of assets over a period of time as a result of wear and tear. As depreciation increases, it affects balance sheet, income statement and cash flow hence net income and operating income will directly decrease. This would lead to lower net assets reflected in the balance sheet (Anderson, 1995).

Trading securities Available for Sale refers to equity security or debt that is normally purchased purposely for sale before maturity period elapses or being sold before lengthy time period passes. It is reported in the financial statement as a fair value and included in the comprehensive income until the time securities are sold. Held to maturity securities refers to the debt securities owed by an investor up to the time they mature and cease to exist. In this case, investors are not concerned about price fluctuations that take place at that time (Diamond, 1995).

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