What Is an Adjusted Basis in Accounting?

An asset's adjusted basis is its carrying value on the balance sheet.

Accrual basis accounting requires that expenses be recognized in the period in which they are incurred, but long-lived assets will often have useful lives that extend multiple accounting periods. For instance, a manufacturing firm may purchase a machine that is expected to run for 10 years. It would not be appropriate for a company to record the entire expense in the year the machine is purchased because the company has not completely consumed the benefit of the machine. For this reason, expenses incurred to acquire long-lived assets are capitalized on the balance sheet and depreciated over their useful lives.

Original Basis

The original basis on an asset is its original cost of acquisition. This can include the purchase price, as well as all expenditures necessary to bring the asset to its desired condition and location of use. For instance, assume a manufacturing firm purchases a machine. The machine’s original basis includes the purchase price, the shipping costs and the costs incurred to install and setup the machine once it arrives.

Depreciation, Amortization and Depletion

The original basis, along with the asset’s estimated useful life, allocation method and estimated residual value, are used to determine the amount of expense recognized each period. This allocation of expenses is known as depreciation in the case of operating assets, amortization in the case of intangible assets and depletion in the case of natural resources. The entry to record the expense is offset with an entry to a contra-account called accumulated depreciation, amortization and depletion. This reduces the carrying value of the asset on the company’s balance sheet. An asset will be depreciated until its adjusted basis is equal to the estimated residual value.

Repairs, Improvements and Additions

Repairs and maintenance are usually expensed as incurred because they do not offer any additional future benefit to the company. Improvement and additions, on the other hand, can provide new benefits for the company, so they are typically capitalized and depreciated, amortized or depleted over the asset's useful life.

Determining Adjusted Basis

An asset’s adjusted basis is determined by adding improvements and additions to the original basis and then subtracting depreciation, amortization or depletion. This adjusted basis is reported on the company’s balance sheet at the end of the reporting period.

Use of Adjusted Basis

Depreciation, amortization and depletion are methods of allocation, not valuation. An asset's adjusted basis may be different from its actual value. When an asset is sold the proceeds are reduced by the adjusted basis to determine the gain or loss realized on the disposition of an asset.

References

• "Intermediate Accounting"; Jan R. Williams, et al; 1995