Temporary investments are holdings of highly marketable and liquid
securities, representing the investment of temporary excess cash balances.
If these are to be classified as a current asset, the firm must intend eventu-
ally to use these funds in current operations. If, however, the securities are
to be sold to finance the purchase of fixed assets or to cover some long-
term obligation, such holdings are more correctly grouped with the other
assets or miscellaneous assets.
Fixed Assets The fixed assets and the current assets are the two important
asset classes. The fixed assets are items from which the funds invested are
recovered over a relatively longer period than those invested in the current
assets. The fixed assets are also called capital assets, capital equipment, or
the fixed plant and equipment of the firm. Buildings and structures, ma-
chinery, furniture, fixtures, shelves, vehicles, and land used in the firm’s op-
erations constitute fixed assets. Almost all fixed assets except land are
depreciable. In determining the value of a fixed asset, we must remember
that their economic life is not limitless, and that eventually they will wear
out or otherwise prove economically useless in their present employment.
The accounting reports allow for the loss of value on fixed assets
through the passage of time by setting up a reserve for depreciation, al-
lowance for depreciation, or accumulated depreciation account. Every fis-
cal period a previously determined amount is set up as the current charge
for depreciation, and is subtracted as an expense on the income statement.
The matching credit is placed in the allowance for depreciation account,
where it accumulates along with the entries from previous periods until ei-
ther (1) the allowance for depreciation equals the depreciable value (origi-
nal cost less estimated scrap value) of the asset or (2) the asset is sold, lost,
or destroyed. On the balance sheet the allowance for depreciation consti-
tutes a valuation account or reserve; the historically accumulated deprecia-
tion is subtracted from the original acquisition cost of the fixed assets, and
the balance, called net fixed assets, is added into the sum of the total assets.
The problem of making adequate allowance for depreciation and de-
termining the periodic depreciation charge properly has caused consider-
able difficulty for accountants. The most commonly used depreciation
method is the straight-line method. This technique is quite simple (ac-
counting, among other reasons, for its popularity). The probable useful life
of the asset is estimated; the estimated scrap value of the asset is deducted
from its original cost in order to obtain its depreciable value; the deprecia-
ble value divided by the estimated life gives the yearly depreciation. This
depreciation charge remains the same year after year even though the net
book value of the asset is constantly reduced.
Although the straight-line method is the most popular, it does not reflect