Accounting does not attempt to reflect the market value of your assets. Your accounting statements reflect the cost of purchase.
The process of capitalizing and depreciating (or amortizing) major purchases allows the cost to be shared over the years of useful life. You can see other FAQs on aspects of this process:
- I’m still using a capital asset that has been fully depreciated. Is this ok?
- I discarded my capital asset before it was fully depreciated. Now what?
- How do I estimate the useful life of a capital asset?
- I bought my capital asset part-way through the year. Should I take a full year of depreciation?
- I just bought a computer. Why doesn’t it show up as an expense?
It’s also true that the capital assets on your balance sheet indicate the investment your organization has made into significant purchases that support and enable your operations. It’s important to declare that you’ve purchased sufficient equipment to allow staff to carry out their work, and that you own a building, or have invested in renovations to improve the property that you lease.
Indeed, in the commercial world (not so much in the not-for-profit) companies calculate “return on assets” as a measurement of their productivity and success.
However, consider how hard it would be to show market (or resale) value.
You may just have bought a nice, state of the art computer for $1500 – but the moment you take it out of the box, it’s used equipment. You may not even have plugged it in – but you couldn’t expect to get $1500 if you tried to resell it. After you’ve used it for a year, how much would it be worth as a second-hand machine? And yet, as far as your organization is concerned, it’s still a useful and functional item in the office.
If that’s the case with equipment, which wears out and becomes obsolete, you can imagine that dealing with real estate – where market values can float up and down over time – would be much more complex.
To create meaningful financial statements, it’s essential to have a constant unit of measurement. Generally Accepted Accounting Principles (GAAP) recognize this through the Stable Dollar Concept, which assumes that the purchasing power of a dollar remains unchanged over time. This allows us to make reasonable comparisons between fiscal years.
That said, there are circumstances where it is permissible to “write up” or “write down” an asset to reflect a permanent change in its value. Your accountant can advise whether this pertains to your organization.
