Depreciation 1

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Depreciation 1

  1. 1. ACCOUNTING FOR DEPRECIATION Prof. C. P. Gupta
  2. 3. Learning Objectives… <ul><li>Fixed Assets? </li></ul><ul><li>Depreciation? </li></ul><ul><li>Depreciation, Depletion, Amortization, and Impairment? </li></ul><ul><li>Methods of Depreciation? </li></ul><ul><li>Accounting for Depreciation </li></ul><ul><li>Accounting Standards for Depreciation </li></ul><ul><li>Presentation and Disclosures? </li></ul>
  3. 4. Fixed Assets … <ul><li>Fixed Assets are long-term assets and usually, they have a life more than one year. </li></ul><ul><li>Fixed Assets are assets from which benefits are to accrue in future or it provides a stream of future benefits. </li></ul><ul><li>Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. </li></ul>
  4. 5. Characteristics of Fixed Assets … <ul><li>Long-term nature </li></ul><ul><li>Future benefits </li></ul><ul><li>Non-recurring expense </li></ul><ul><li>Not held for sale in the ordinary course of business. </li></ul><ul><li>Not financial assets </li></ul><ul><li>Tangible Assets </li></ul><ul><li>Determines the production capacity </li></ul><ul><li>Usually, of greater amount </li></ul>
  5. 6. Examples of Fixed Assets …
  6. 7. Capital Expenditure vs Revenue Expenses
  7. 8. Test your understanding about Fixed Assets …
  8. 9. Identify from the following which are fixed assets and which are not. <ul><li>Lathe Machine. </li></ul><ul><li>Building taken on 50 years lease. </li></ul><ul><li>Coolants. </li></ul><ul><li>Share of Subsidiary Company. </li></ul><ul><li>Car for the CEO for official purposes. </li></ul><ul><li>Iron steel – sponge </li></ul><ul><li>Packaging Machine </li></ul><ul><li>Papers and stationery </li></ul><ul><li>Machine taken on lease – annaul lease rental Rs. 0.5 million. </li></ul><ul><li>Coffee Powder purchased by Lavaza. </li></ul>
  9. 10. Cost of Fixed Assets … A challenge…
  10. 11. Cost of a fixed Assets includes… <ul><li>All those expenses necessary to incur to bring the asset into operation or to have its commercial operation. </li></ul><ul><li>The CUT-OFF point is the day of operation; before that all expenses related to an asset have to be capitalized; and after that all expenses have to be treated as Revenue Expenses related to the assets. </li></ul>Day of Operation Before, Capital Expense After, Revenue Expense
  11. 12. <ul><li>Sales tax and freight costs </li></ul><ul><li>Installation and assembling </li></ul><ul><li>Repairs and reconditioning (used assets) </li></ul><ul><li>Testing and modifying </li></ul><ul><li>Insurance while asset is in transit </li></ul><ul><li>Trial run Cost </li></ul><ul><li>Mandatory Spares </li></ul>Costs of Acquiring Fixed Assets Include:
  12. 13. <ul><li>Vandalism and uninsured theft </li></ul><ul><li>Mistakes in installation </li></ul><ul><li>Damage during unpacking and installing </li></ul><ul><li>Refundable taxes and duties </li></ul><ul><li>Spares Cost – Not Mandatory </li></ul>Costs of Acquiring Fixed Assets Exclude:
  13. 14. Indicate which of the following items will be taken as part of Fixed Asset Costs. <ul><li>Lease rentals of machines taken on operating lease. </li></ul><ul><li>Insurance premium paid for machinery in transit. </li></ul><ul><li>Cost of creating shed for the installation of a machinery </li></ul><ul><li>Two years AMC paid for the machine </li></ul><ul><li>Interest Paid during construction of a factory on a loan taken for this purpose. </li></ul><ul><li>Cost of trail Runs and Quality Test </li></ul><ul><li>Cost of maintenance department allocated to the machine </li></ul><ul><li>Fee paid to the consultant for the purchase of this asset </li></ul><ul><li>Cost of damages occurred during installation of a machine. </li></ul><ul><li>Cost of import duty paid on a machinery </li></ul>LEARNING BY TESTING
  14. 15. Accounting for Fixed Assets – Purchase and Other Expenses <ul><li>A machinery is purchased against a cheque of Rs. 50,000. </li></ul><ul><li>A machinery is purchased from XYZ on credit for Rs. 20,000. </li></ul><ul><li>A machinery is purchased for Rs. 15,000 and Rs. 5,000 paid for installation. </li></ul><ul><li>On the above, Rs. 1,000 paid for conducting necessary trial runs. </li></ul><ul><li>Electrician's fee to install a new power outlet required by a new CNC Machine </li></ul>
  15. 16. Where are they shown in the books of accounts?
  16. 17. Depreciation … Please note that fixed assets are subject to Depreciation.
  17. 18. Depreciation… <ul><li>Depreciation is a process of allocating the cost of assets to the period in which the firm receives the benefits from them. </li></ul><ul><li>Depreciation involves: </li></ul><ul><ul><li>… allocating the cost of tangible assets to expense in a systematic and rational manner to periods expected to benefit from use of its depreciable assets . </li></ul></ul>
  18. 19. Depreciation ………..??? <ul><li>Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined. </li></ul>
  19. 20. Objective behind Depreciation <ul><li>Fixed Assets are subject to depreciation and thus, depreciation needs to be provided so as to </li></ul><ul><ul><li>Ensure allocation of original cost of a fixed asset over its useful life; </li></ul></ul><ul><ul><li>Ascertaining the true cost of operations; and </li></ul></ul><ul><ul><li>Providing current valuation of fixed assets in the Balance Sheet. </li></ul></ul>

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