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<chapter id="chapter_other_assets">
  <title>Other Assets</title>

  <sect1 id="accts-oa1">
    <title>General Concepts</title>

    <para>This chapter presents many additional accounting treatments for 
    frequently encountered business and less-frequently found personal activities
    that need recording in accounting books.  The explanations below cover both the
    description and purpose of the activity, and they include also the usual 
    accounting treatments (bookings or recordings) for these transactions.</para>
  
    <para>These concepts have evolved over centuries of experience by those
    keeping accounting records and will help you maximize your record keeping's
    utility and meaningfulness.</para>
  
    <para>This section introduces categorization of assets in the balance sheet 
    based on time or the asset's useful life (current and long-term).  Sometimes
    assets are also considered from the standpoint of their <emphasis>liquidity
    </emphasis>, which is regarded as how close or distant the asset is from
    being turned into cash.   Near-cash assets are relatively quickly converted 
    to cash (e.g., accounts receivable), while assets requiring rather a long 
    time to convert to cash are considered to be relatively <emphasis>fixed
    </emphasis> in their non-cash state (e.g., heavy equipment, buildings, land).
    [Fixed does not mean they were repaired!]</para>
    
    <para>You should find that current assets parallel those with more liquidity,
     while long-term and fixed assets are those with much less liquidity.  Finally,
     below you will find a few assets that could be either current or long-term
     based on the nature of the facts constituting them.</para>
    </sect1>
    
    <sect1 id="accts-oa2"> 
      <title>Other Assets Described</title>
        <sect2 id="accts-oa3">
          <title>Current Assets Described</title>    
          <para><guilabel>Current Assets</guilabel> are those activities whose 
          normal expected life would be one year or less.  Such activities could
          be tracking reimbursable expenses, travel advances, short-term loans 
          to a friend or family member, prepaid expenses, annual insurance 
          premium amortization, and so on.  The individual entity could have 
          many other kinds of short term activities that reflect what it is 
          doing.  [These asset types are explained individually below.]
          </para>
          </sect2>
          
          <sect2 id="accts-oa4">
          <title>Long-term (Fixed) Assets Described</title>    
          <para><guilabel>Long-term (Fixed) Assets</guilabel> are those 
          activities whose normal expected life exceeds 1 or more years.  This 
          grouping covers both tangible and intangible assets. Examples of 
          tangible assets are land, buildings, and vehicles (cars, trucks, 
          construction equipment, factory presses, etc.)  Intangible assets 
          include such things as patents, copy rights, goodwill, etc.  Because 
          the lives of some of these assets show wear and tear and deterioration 
          in value over time, businesses and individuals can allow for that 
          diminution in value by calculating depreciation on such assets.  For 
          example, land normally does not depreciate, but buildings do, as do 
          equipment and vehicles.  [These asset types are explained individually
           below.]</para>
         </sect2>
    </sect1>
    
    <sect1 id="accts-oa5">
      <title>Current Assets</title>
          <para>This section explains short-term receivables, reimbursable expenses,
          travel advances, prepaid premiums, prepaid rent, suspense or wash accounts.
          </para>
          
     <sect2 id="accts-oa6">
      <title>Short-term Receivables</title>
          <para><guilabel>Short-term Receivables.</guilabel> This kind of account 
          is useful to reflect an agreement made with someone you trust.  
          Suppose you lent someone $500 and he agreed to repay you $50 a month.  
          If he paid on time, the loan you made would be paid off within a year, 
          which is why it is classified as a short-term receivable.  So you 
          could record that loan initially in this account tree: Other Asset>
          Current Asset>LoanToJoe.  At the time you gave him the money your 
          entry is debit (increase) LoanToJoe $500 and credit (decrease) Bank 
          $500.  Each time you receive Joe's payment you record $50 debit 
          (increase) to Bank and credit (decrease) LoanToJoe.</para>
          
          <para>[Note: don't become confused by the use of the word "Loan".  
          "Loan-To" is the tipoff that you really have a receivable, that is, 
          you will receive from Joe, the money you previously loaned.  Until he 
          actually pays the money owed you, you reflect his debt in your books 
          by an account describing your expectation -- you will receive the 
          money owed you, hence the word "receivable".]</para>
        </sect2> 
               
     <sect2 id="accts-oa7">
      <title>Reimbursable Expenses</title>
          <para><guilabel>Reimbursable Expenses.</guilabel> This kind of activity 
          is one in which you spend your own money on behalf of someone else 
          (your employer, perhaps) and later you receive repayment of what you 
          spent.  The case might be a business trip. The employer has a policy 
          of covering (paying for) all expenses that he authorizes.  After the 
          trip is over, the employee submits a report listing dates and amounts 
          spent with receipts for all the expenditures.  The employer reviews 
          the report and pays for all items that he considers belongs to his 
          business.  [Normally, employees know in advance what the employer will 
          reimburse, so only those items are recorded as a reimbursable expense 
          on the employee's books.]</para>
          
          <para>Because a business trip can involve different kinds of expenditures 
          (air travel, lodging, transportation at the destination, etc.), 
          different kinds of expenditures would be recorded in the one account 
          as long as the expenditures all related to the same trip.  In other 
          words, if a second trip is made before the first is fully settled, a 
          second account for a different event could be set up.  It would make 
          sense to do this, if it would help to keep separate all the details of 
          one trip from those of another.  It is up to the person making the 
          trip to decide how much trouble it would be to put separate trips in 
          separate accounts or to put them all in the same account.  The trip 
          taker should remember that the  account must be reconciled in order to
          know with certainty that all he spent has been reimbursed to him.</para>  
          
          <para>Recording the expenditures on the trip would be much the same.  
          That is, if you paid trip expenses by cash you would debit (increase) the 
          reimburseable expense account for the money paid in cash, because it 
          is a receivable to you until it has been reimbursed to you.  The credit
          offsetting your expenditure would decrease the account that shows the 
          cash in your pocket or the account from which you drew the cash for 
          the payment made.  If you paid by credit card, the debit side would be 
          the same as just described,  but the credit would be an increase to the
          credit card company account on your books.</para> 
          
          <para>When you received your reimbursement, then the journal entry (or 
          transaction) to record receipt of the funds from the employer would be:
          debit (increase) Bank for the check amount and credit (decrease) the
          reimbursable expense account for the check amount.</para>
          
          <para>If it turns out that the reimbursable expense account is not 
          zero balance after processing the employer's payment, then it means that 
          there is a difference between you and the employer in handling the expense, 
          which difference needs to be investigated.  If the balance is a debit 
          (a positive balance), your account has some money that was not reimbursed.  
          If the balance is a credit (a negative balance), you were paid for more 
          than what you recorded as due you. In both of those situations you should 
          reconcile the difference between what you recorded and what was paid.  
          That effort should disclose exactly what is causing the discrepancy.  
          You will need to contact the employer's bookkeeper to know what was paid,
          if the reimbursement check was not accompanied by a detailed list of the
          items being paid you.</para>
          
          <para>In the event the employer refused to reimburse you for an 
          expenditure, that effectively makes it your expense.  In that case, you 
          would make this entry: debit (increase) your own Expense 
          (appropriately named) and credit (decrease) the Reimbursable Expense        
          account.  That entry should result in a zero balance in the 
          Reimbursable Expense account.  If not, reconcile until you identify 
          the difference.</para>
          
          <para>[Sometimes there are small differences that don't match an 
          individual entry.  In those cases divide the amount by 2 or by 9.  If 
          the unresolved amount is divisible by two, it suggests that both you 
          and the employer entered the item in the same manner: both as debits 
          or both as credits.  If it is divisible by 9, then likely one of you 
          transposed adjoining numbers; e.g., one entered 69 and the other 
          entered 96.  If the difference is divisible neither by 2 or by 9, then
          it could be that more than one error is present.]</para>
        </sect2> 
        
     <sect2 id="accts-oa8">
      <title>Travel Advances</title>
          <para><guilabel>Travel Advances.</guilabel> These are very similar to 
          Reimbursable Expenses.  The difference is that someone gives you his 
          money first; you spend it, and then you give a report accounting for 
          what you spent it on.  The report is supported by invoices establishing 
          who, what, where, when, and how much for each expenditure.  In the 
          Reimbursable Expense case, you spent your money first and later 
          recovered it.</para>
          
          <para>In the Travel Advance case when you receive the advance, you 
          record on your books this entry: debit (increase) Bank for the travel 
          advance amount received (say, $500); credit (increase) short-term 
          liability -&gt; Travel Advance ($500).  This is a liability, because 
          you are not gifted with the money, but only loaned it for the purpose 
          of having funds to spend when doing the employer's business.</para>
          
          <para>Frequently, the way these monetary arrangements work is that at 
          the beginning of the salesman's employment, he receives the advance 
          and monthly (or more frequently) turns in a report about who, what, 
          where, when, and how much he spent.  The money in the report is paid 
          to him in the amount the report asks for, assuming all was approved.
          </para>
          
          <para>During the period after receiving the advance and before filing 
          a request for reimbursement report, he can record his expenditures into 
          the advance liability account.  If he does that, the balance 
          in the account will show how much of the advance he has not yet spent 
          (assuming the Travel Advance balance is a credit).  If no mistakes have 
          been made and all expenses are approved, then the sum of the unspent 
          account balance and the reimbursing check amount will equal the original 
          travel advance amount.</para>
      
          <para>That he records the travel expenses to this advance account (and 
          not to his own expense accounts) makes sense, because he is spending 
          his employer's money for the employer's authorized expenses.  He is 
          not spending his own money for his own books to record as his expenses.
          </para>
          
          <para>When he receives the report reimbursement (say, $350), he debits 
          (increases) Bank, and credits (increases) again the Travel Advance 
          liability account, assuming that previously he had been recording 
          expenditures to the travel advance account.  Tracking activity in this 
          manner causes the account always to show the amount that he owes the 
          employer.</para>
          
          <para>See the Reimbursable Expense discussion above for what to do if 
          the employer does not accept an item the employee put on the travel 
          advance reimbursement request report.  The difference resolution effort 
          is essentially the same for both types of accounts.</para>
        </sect2> 
        
     <sect2 id="accts-oa9">
      <title>Prepaid Premiums or Prepaid Rent</title>
          <para><guilabel>Prepaid Premiums or Prepaid Rent.</guilabel> Some types of 
          expenses are usually billed as semi-annual or annual amounts.  For 
          example, the insurance industry will bill home insurance annually, 
          while car insurance premiums can be annual or semi-annual.  For those 
          that pay an amount that covers several months or a full year, the 
          proper accounting treatment is to reflect in each accounting period 
          the amount that expresses the benefit applying to that period.</para>
          
          <para>In the case of someone who pays a full-year's insurance premium 
          at the beginning of the insurance period, the entry to record this is 
          debit (increase) Prepaid Insurance Premium for say, $1200, and credit 
          (decrease) Bank for $1200.</para>
          
          <para>Then a monthly recurring journal entry (scheduled transaction) 
          is created that debits (increases) Insurance Expense $100 and credits 
          (decreases) Prepaid Insurance Premium $100.  This technique spreads 
          the cost over the periods that receive the insurance coverage benefit.  
          Businesses following generally accepted accounting practices would 
          normally use this technique, especially if they had to present 
          financial statements to banks or other lenders.  Whether individuals do 
          depends on the person and how concerned they are to match cost with 
          benefit across time periods.  Another factor influencing use of this 
          technique would be the number of such situations the person encounters.  
          It is relatively easy to remember 1 or two, but more difficult if 
          having to manage 10 to 20.  You would set up as many or as few as proved
          useful and important to you.</para>
        </sect2>
         
     <sect2 id="accts-oa10">
      <title>Suspense or Wash Accounts</title>
          <para><guilabel>Suspense or Wash Accounts.</guilabel> The purpose of 
          these accounts is to provide a device to track "change of mind" situations.
          The objective of these accounts is to provide a temporary location to
          record charges and credits that are not to be included permanently in 
          your books of record.  When the transactions reflected in these accounts
          have been fully completed, Wash/Suspense accounts will normally carry 
          a zero balance.</para>
           
          <para>For example, say in the grocery store you see canned vegetables on sale, 
          so you buy 6 cans at $1 per can.  Say that the total purchases were $50.  
          When you come home and are putting things in the cupboard you discover 
          you already had 12 cans.  You decide to return the 6 you just bought.  
          Some persons in this situation would charge (increase) the whole bill 
          to Grocery Expense; and when they returned the cans, they would credit 
          (decrease) Grocery Expense.  That is one way of handling that.  The effect
          of this method is to leave recorded on your books the cost of items that
          you really did not purchase from a permanent standpoint.  It is only 
          when the items have actually been returned and the vendor's return 
          receipt has also been recorded that the distortion this method generates
          will then be removed.</para>
 
         <para>Actually, there are several treatments, depending on when and how 
         the original transaction was booked/recorded and when you decided to 
         return the items purchased.  Basically, did you change your mind before 
         you recorded the transaction or after doing so?</para>  
         
         <para>If you decided to return the items after recording the purchase 
         transaction, you may originally have charged Grocery Expense for the full 
         amount ($50) of all items.  In that scenario, what you kept and the amount of 
         the items to be returned were grouped into one account.  You could edit the
         original transaction and restate the amount charged to the Grocery Expense
         account to be the difference ($41) between the total paid ($50) for groceries 
         and the value of the items to be returned.  That leaves the returned-item 
         value as the amount ($6) you should record to the Suspense account.</para>
          
         <para>Obviously, if you decided to return items before you recorded your
         purchase, then you would book the original entry as a charge to Grocery
         Expense for the amount kept ($41) and as a charge to Suspense for the 
         amount returned ($6).  The off-setting credit ($50) to cash or credit 
         card is not affected by these treatments.</para>
          
         <para>When there are several persons shopping and at different vendors, 
         there can be a case where there are several returns happening at once 
         and in overlapping time frames.  In that case the Wash Account is 
         charged (increased) at time of changing the mind, and either Bank or 
         Credit Card is credited.  When the return occurs, the reverse happens: 
         Bank or Credit Card is debited for the cash value of the returned items 
         and the Wash/Suspense Account is credited in the same amount.</para>
         
         <para>If the wash account has a non-zero balance, scanning the debit 
         and credit entries in the account will show the non-matched items.  
         That is, debits not matched by offsetting credits indicate items 
         intended to be returned but not actually returned yet.  The reverse 
         (credits not matched by offsetting debits) indicates that returns were 
         made but the original charge was not recorded in the Wash Account.</para> 
         
         <para>These differences can be cleared up by returning unreturned items 
         or recording charges (debits) for items already returned.  The mechanics 
         of doing that likely will be finding the original expense account the 
         item was charged to and making an entry like: debit Wash Account, credit 
         original expense.  It also could be as described above where the original
         recording is adjusted by adding a charge to Wash/Suspense account and 
         decreasing the amount charged to the original account.</para>
     </sect2>
    </sect1>
    
    <sect1 id="accts-oa11">
      <title>Short or Long-term Assets</title>
          <para>This section explains why some types of assets may be short or 
          long-term and presents an example.
          </para>
          
          <para>An example is deposits (e.g., utility, rental, security).  If the 
         deposit agreement contains a provision to recover the deposit at the 
         end of a year, the treatment could be that of a short-term asset.  
         However, when the agreement is that the deposit holder returns the 
         funds only upon successful inspection at the end of the relationship, 
         then at the start of the relationship or agreement, the person paying 
         the deposit has to decide whether to write it off as a current expense 
         or to track it for eventual recovery at the end of the agreement 
         (not infrequently, moving to a new location).</para>
          
         <para>Whichever decision is made, the accounting treatment is to debit 
         (increase) expense [assuming the write-off decision] or debit (increase) 
         Deposits Receivable [assuming the intent is to recover the deposit in 
         the future] and credit (decrease) Bank for the amount of the deposit 
         (if paid by cash) or credit (increase) credit card if  paid using that 
         payment method.</para>
      </sect1>

    <sect1 id="accts-oa12">
      <title>Long-term (Fixed) Assets</title>
          <para>This section illustrates long-term assets (those whose useful lives 
          exceed 1 year) and discesses these types: land, buildings, leasehold 
          improvements, intangibles, vehicles and other equipment.</para>
          
     <sect2 id="accts-oa13">
      <title>Land</title>
         <para><guilabel>Land</guilabel> is not a wasting asset.  That is, it 
         does not get used up over time and rarely suffers  damaage such that it
         loses value.  For that reason, it usually is recorded at cost at the 
         time of purchase.  Appreciation in its value over decades is not recorded 
         and is not recognized in any way on the books of the owner.  It is only 
         after land has been sold that sale price and purchase cost are compared 
         to calculate gain or loss on sale.</para>
         
         <para>Land is frequently sold/purchased in combination with structures 
         upon it.  That means that the cost has to become separated from the 
         cost of structures on it.  Land valuation is usually part of the trans-
         fer of ownership process and its value is shown on the purchase documents 
         separately from that of any structures it supports.</para>
         
         <para>Land values shown on purchase documents frequently arise from the
         process of value determination managed by assessors whose job it is 
         to assign values to land for tax purposes.  Local and regional areas of
         a state or province use the values determined by assessors in their tax
         formulas, which provide revenues for local and regional governing 
         authorities to finance their required community services.</para>
         
         <para>Should land be acquired in a situation not subject to a history of 
         land valuation by a formal valuation system, then the purchaser can appeal 
         to real estate agents and an examination of recent sale transactions for 
         information that would allow calculating a reasonable amount to express 
         the value of the land.</para>
        </sect2>
         
     <sect2 id="accts-oa14">
      <title>Buildings</title>
         <para><guilabel>Buildings</guilabel> are the man-made "caves" in which 
         much of life's human interaction occurs.  These structures are wasting
         assets, because in their use they or their components gradually wear.  
         Over time they begin to lose some of their function and they can suffer
         damage due to planetary elements or human action.</para>
         
         <para>Accepted accounting practice is to record the cost of the building 
         determined at time of ownership transfer (purchase) or at conclusion of all  
         costs of construction.  Because buildings are frequently used for decades, 
         and due to the need to be able to calculate gain or loss on sale, 
         accounting practice preserves the original cost by not recording declines 
         in value in the account containing the original purchase or construction 
         cost.</para>
         
         <para>Instead, the depreciation technique is used to show [in the 
         balance sheet] the structure's net book value [original cost reduced by 
         accumulated depreciation].  Depreciation is a separate topic treated 
         elsewhere in this Guide.</para>
        </sect2> 
        
     <sect2 id="accts-oa15">
      <title>Leasehold Improvements</title>
         <para><guilabel>Leasehold Improvements.</guilabel> When a business does 
         not own the building where it does business, and instead has a long-term
         lease, it is not uncommon for the business tenant to make improvements to
         the premises so that the structure obtains both function and appearance 
         that enhances conducting its business activities.</para>
          
         <para>In these cases, the expenditures that the business incurs are recorded 
         in a Leasehold Improvements account: increase (debit) Leasehold Improvements,
         decrease (credit) Bank or increase (credit) a suitable liability account 
         [which could be a liability to a contractor or a bank or a credit card, 
         etc.].</para>
         </sect2> 
         
     <sect2 id="accts-oa16">
      <title>Vehicles or Equipment</title>
         <para><guilabel>Vehicles or Equipment</guilabel> of all kinds usually 
         last for several years, but their useful lives are much shorter than 
         that of assets that have little movement in their functioning.  Because 
         they do wear out over time, common accounting practice in business is 
         to record depreciation using life spans and depreciation methods 
         appropriate to the nature and use of the asset.  Frequently, the life 
         and depreciation methods chosen are influenced by what is permitted per 
         national tax regulations for the kind of asset being depreciated.</para>
         
         <para>Usually, businesses depreciate their assets.  Individuals can 
         do so as well to the degree that taxing authorities permit.  Very wealthy
         persons employ accountants and attorneys to track and manage their 
         investments and assets holdings to take advantage of all tax benefits
         permitted by law.</para>
         </sect2> 
         
     <sect2 id="accts-oa17">
      <title>Intangibles</title>
         <para><guilabel>Intangibles.</guilabel> The mechanics of accounting (debiting 
         and crediting appropriate accounts) for these assets are relatively simple,
         much the same as for any of the above assets.  Where the difficulty lies 
         is in their valuation, which is an advanced topic and not something that 
         individual persons and small businesses would likely encounter.  For that 
         reason further discussion of items such as patents, copyrights, goodwill, 
         etc. are left until someone has an actual need for such information.</para>
      </sect2>
     </sect1>
    </chapter>
    
