What is Adjusted Basis in Accounting?

Posted In | Finance | Accounting Software

Adjusted basis is a term used in accounting to refer to the adjusted carrying value of an asset. It is calculated by adding the cost of the asset and any additional costs incurred to improve or enhance the asset, and subtracting any deductions or allowances for depreciation or depletion. The adjusted basis of an asset is used to determine the capital gain or loss on the sale or disposal of the asset. 

 

When an asset is sold for more than its adjusted basis, the difference represents a capital gain, which is included in the company's taxable income. When an asset is sold for less than its adjusted basis, the difference represents a capital loss, which can be used to offset capital gains and reduce the company's taxable income.

 

 

How to Calculate the Adjusted Basis of an Asset?

The adjusted basis of an asset is typically calculated at the time of sale or disposal and is used to determine the amount of capital gain or loss on the sale. It is important for companies to accurately calculate the adjusted basis of their assets to ensure that their capital gains and losses are correctly recorded and reported for tax purposes.

 

To calculate the adjusted basis of an asset, the following steps should be followed:

1. Determine the cost of the asset. This is the amount paid to acquire the asset and may include any additional costs incurred to acquire or prepare the asset for its intended use.
    
2. Add any additional costs incurred to improve or enhance the asset. This may include costs such as repairs, maintenance, or upgrades that increase the value of the asset.
    
3. Subtract any deductions or allowances for depreciation or depletion. Depreciation is the systematic allocation of the cost of an asset over its useful life, while depletion is the reduction in the value of natural resources.

The resulting amount is the adjusted basis of the asset. It represents the adjusted carrying value of the asset and is used to determine the capital gain or loss on the sale or disposal of the asset.

 

Example of Adjusted Basis in Accounting

A company purchases a new piece of machinery for $10,000. The machinery has an expected useful life of 10 years and is depreciated using the straight-line method, with a salvage value of $1,000. The company also incurs $500 in costs to install and prepare the machinery for use.

 

Here, 

a. The cost of the machinery is $10,000.

b. The company incurred $500 in costs to install and prepare the machinery for use, so the total cost is $10,500.

c. The machinery is depreciated by $900 ($10,500 - $1,000 / 10 years).

 

After one year, the adjusted basis of the machinery is $9,600 ($10,500 - $900). This represents the adjusted carrying value of the machinery and is used to determine the capital gain or loss on the sale or disposal of the machinery.

 

Conclusion

Overall, adjusted basis is an important concept in accounting that is used to determine the capital gain or loss on the sale or disposal of an asset. It is calculated by adding the cost of the asset and any additional costs incurred to improve or enhance the asset, and subtracting any deductions or allowances for depreciation or depletion. Accurately calculating the adjusted basis of an asset is important for companies to ensure that their capital gains and losses are correctly recorded and reported for tax purposes.

 

Frequently Asked Questions: 

1. What is the difference between unadjusted and adjusted basis?

The difference between the unadjusted and adjusted basis in accounting is that unadjusted basis is the original cost of an asset, including any additional costs incurred to acquire or prepare the asset for its intended use while the adjusted basis is the adjusted carrying value of an asset. It is used to determine the capital gain or loss on the sale or disposal of an asset.

 

2. Where is acquisition on balance sheet?

The impact of an acquisition on a company's balance sheet depends on the specific terms of the acquisition and the accounting treatment applied to the transaction. In general, acquisitions are reflected on the balance sheet in one of two ways: as a purchase or as a merger.

 

3. What type of expense is an acquisition?

In general, acquisitions are treated as either purchases or mergers. If the acquisition is treated as a purchase, the acquiring company will record the assets and liabilities of the acquired company at their fair market value on the date of the acquisition. The excess of the purchase price over the fair market value of the assets and liabilities will be recorded as goodwill. If the acquisition is treated as a merger, the acquiring company will combine the assets and liabilities of the acquired company with its own. The resulting combined balance sheet will reflect the assets and liabilities of both companies at their carrying values on the date of the merger.