Accounting for fixed assets

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Based on your asset and expenditure, understand the various ways of Depreciation while you account your fixed assets.

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Accounting for fixed assets

  1. 1. Capital vs. Revenue Capital vs. RevenueWhy segregate ?£ essential for accounting concept of matching costs with revenues£ distinction affects the ‘bottom line’ directly
  2. 2. Fixed Asset Fixed AssetA fixed assetis an asset held with the intention ofbeing usedfor the purpose of producing goodsand is not held for salein the normal course of business.
  3. 3. Capital Expenditure Capital ExpenditureAn expenditure incurred with a view to bringing an asset into existence or an advantage or a benefit of an enduring naturefor the business, is treated as capital expenditure.
  4. 4. Revenue Expenditure Revenue Expenditure An expenditure incurred for day-to-day running of the business,is treated as revenue expenditure.
  5. 5. Deferred Revenue Expenditure Deferred Revenue ExpenditureAn expenditure which is not in the nature of capital expenditure or does not bring any asset into existence, but yet the benefit of which to the business would be enjoyed over, say 3-5 subsequent years, is treated as deferred revenue expenditure.
  6. 6. Components of Cost of Fixed Asset Components of Cost of Fixed Asset1. Purchase Price.2. Import duty / any other non-refundable levy.3. Any directly attributable cost of bringing the asset to its working condition.4. Borrowing cost of funds that finance the asset.5. Commissioning and trial expenses until commencement of production.
  7. 7. Revaluation of Assets Revaluation of AssetsGenerally not allowed unless there are validand compelling reasons.These reasons & basis for revaluation mustbe disclosed.A class of assets is revalued and not anindividual one.Increase in value is credited to RevaluationReserve a/c and decrease written off toProfit & Loss a/c
  8. 8. Machinery Spares Machinery Spares ‘ not specific to a particular machine / asset & can be used for generally for various items of assets’ are treated as any other inventory and expensed on issue.‘ specific to a particular machine / asset & can be used in connection with that asset only’‘ use expected to be irregular’ are capitalized to be written off in a systematic manner over a period.
  9. 9. Accounting for Fixed Assets Accounting for Fixed AssetsAsset Account Related Expense*Land NoneProperty, Plant, Equipment DepreciationNatural Resources Depletion(like mines, oilfields )Intangibles Amortization * on income statement
  10. 10. Depreciation DepreciationEvery year depreciation is calculated and journal entry passed as under Depreciation Expense a/c dr To Accumulated Depreciation a/c** is a contra account and its matching pair is the asset a/c.
  11. 11. Depreciation DepreciationEvery year depreciation is calculated and journal entry passed as under Depreciation Expense a/c dr To Accumulated Depreciation a/c- is a contra account and its matching pair is the asset a/c.- is a non cash expense, hence added to net income in cash flow statement.
  12. 12. Depreciation DepreciationIn the Balance Sheet Assets are shown atGross Valueless Accumulated Depreciation_________________________Book Value
  13. 13. Depreciation DepreciationGAAP provide for several methods of depreciation – we study these threei ] Straight Lineii ] Units of Production (UOP)iii ] Written Down Value (WDV)
  14. 14. Depreciation DepreciationGAAP provide for several methods of depreciation – we study these threei ] Straight Line – straight line depreciation allocates an equal amount of expense each year during useful life of the asset.
  15. 15. Depreciation DepreciationGAAP provide for several methods of depreciation – we study these threei ] Straight Line – straight line depreciation allocates an equal amount of expense each year during useful life of the asset. cost of asset less its residual valueCalculation = expected useful life in years
  16. 16. Depreciation DepreciationGAAP provide for several methods of depreciation – we study these threei ] Straight Lineii ] Units of Production ( UOP )–Method involves two step process1. Calculate the UOP rate = cost of asset less its residual value divided by expected useful life in UOP
  17. 17. Depreciation DepreciationGAAP provide for several methods of depreciation – we study these threei ] Straight Lineii ] Units of Production ( UOP )–Method involves two step process1. Calculate the UOP rate2. Multiply the rate by actual UOP during the period.
  18. 18. Depreciation DepreciationGAAP provide for several methods of depreciation – we study these threei ] Straight Lineii ] Units of Production (UOP)iii ] Written Down Value (WDV) –- depreciation is calculated as %.- following year’s depreciation at % above, applied to the book value at beginning of the year.
  19. 19. Depreciation DepreciationGAAP provide for several methods of depreciation – we study these threei ] Straight Lineii ] Units of Production (UOP)iii ] Written Down Value (WDV) – - approved by Indian Income Tax laws. - ignores residual value in the first year’s depreciation.
  20. 20. Depreciation Depreciationi ] Straight Lineii ] Written Down Value (WDV) – If asset put to use in the middle of a year. depreciation in the first year is equal to depreciation for full year x fraction of year asset used. If asset commissioned in January , depreciation will be one fourth of full year.
  21. 21. Sale of Asset Sale of Assetat some point , fixed assets are no longeruseful and need to be sold, exchanged ordiscarded.at this time asset account is credited &accumulated depreciation is debited.
  22. 22. Sale of Asset Sale of Assetat some point , fixed assets are no longer usefuland need to be sold, exchanged or discarded.at this time asset account is credited &accumulated depreciation is debited.if sale value of the discontinued asset ismore (less) than its book value, a gain (loss)is realized.this is credited to (written off) profit & lossaccount.
  23. 23. “ Accounting for capital expenditure is critical as segregation between capital & revenue expense has direct impact on the bottom line.Depreciation is a major non-cash expense that provides cash inflow for business.All assets are depreciated in a consistent manner so that there are no hits to bottom line when asset reaches end of its useful life”

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