Course Outline
Join PRO

What is the rationale for not reporting plant assets at their liquidation value?

Author:
Harold Averkamp, CPA, MBA

I will assume that the plant assets‘ liquidation values are higher than the present carrying values when answering your question.

Plant assets (buildings and equipment used in manufacturing; also called fixed assets) are not reported at their higher liquidation value because of several accounting principles. Below are four accounting principles that come to mind.

The cost principle requires that plant assets be reported at amounts that are not greater than cost. Cost is an objective and verifiable amount. Liquidation value is subjective and the amount can vary significantly depending on the assumptions made.

The matching principle requires that the cost of plant assets be allocated to depreciation expense. This means that over a plant asset’s useful life some of the plant asset cost is matched with revenues on the income statement. Therefore the plant asset’s carrying amount will be decreasing each period.

The going concern assumption implies that the company will be continuing in business. Since it is assumed that the company is not liquidating, the liquidation value of the plant assets is not relevant.

The revenue recognition principle prohibits a company from showing a gain from merely holding a plant asset. What would you credit if you increased the plant asset amount?

Those four accounting principles provide some of the rationale for not reporting the liquidation value when it is higher than cost.

If a company is not a going concern or if the plant asset’s value has been impaired, the above rationale does not hold. For those situations you will need to follow the appropriate accounting rules.

Join PRO to Track Progress
Must-Watch Video

Learn How to Advance Your Accounting and Bookkeeping Career

  • Perform better at your current job
  • Refresh your skills to re-enter the workforce
  • Pass your accounting class
  • Understand your small business finances
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus