Capitalized leases (which will be discussed in greater detail in Chapter 9) are an accounting creation that recognizes the substance of some lease transactions over their form. In other words, when a government enters into a lease for an item, which, in substance, is a purchase of the item, the item is recorded as a capital asset of the organization, even though the organization does not have title to the asset.

Practical Example A government leases a copier machine that has a useful life of 10 years. The term of the lease is 10 years. Since the government is using the asset for virtually its entire useful life, GAAP would require the government to record the copier as a capital asset, along with the liability for future lease payments. (These items will also be discussed in Chapter 7 of this book.)

Property, plant, and equipment is recorded on the statement of net assets at its cost to the government, reduced by accumulated depreciation (with two exceptions, which are discussed below). Accumulated depreciation represents the decline in value of capital assets as they are used in the operation of the government. Depreciation expense is the annual amount charged to expense in government’s statement of activities, which represents an estimate of the amount of the asset that is “used up” in the organization’s operations during the year. Accumulated depreciation sums up the annual amounts of depreciation expense for capital assets and represents a reduction in the recorded cost amount of the asset on the organization’s
statement of net assets.

Accumulated depreciation is a contra account to property, plant, and equipment, meaning that its balance (which is a credit) offsets the gross amount of capital assets that is recorded on the statement of net assets as an asset (debit). The accumulated depreciation account, as its name suggests, is the cumulative amount of depreciation that has been recorded on the assets that are included in property, plant, and equipment. Each year when the depreciation expense is recorded, the accumulated depreciation amount is increased for the amount of the annual depreciation expense. Conversely, when an asset is retired or sold, the amount of accumulated depreciation that is applicable to that particular asset is removed from accumulated depreciation, meaning that the accumulated depreciation account is reduced for this amount.

Taken From : Governmental Accounting Made Easy

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