Fixed Assets Accounting is very essential for matching costs with revenues. A fixed asset is an asset held with the intention of being used for producing goods. Check the above presentation for in-depth details. For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/SlideshareFaccounting Join us on Facebook: http://www.facebook.com/welearnindia Follow us on Twitter: https://twitter.com/WeLearnIndia Read our latest blog at: http://welearnindia.wordpress.com Subscribe to our Slideshare Channel: http://www.slideshare.net/welingkarDLP

1. Welingkar’s Distance Learning Division
Financial Accounting
CHAPTER-7. Accounting for Fixed Assets
We Learn – A Continuous Learning Forum

2. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Capital vs. Revenue
Why segregate ?
£ essential for accounting concept of matching costs
with revenues
£ distinction affects the ‘bottom line’ directly

3. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Fixed Asset
A fixed asset
is an asset held with the intention of being
used for the purpose of producing goods
and is not held for sale in the normal course
of business.

4. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Capital Expenditure
An expenditure incurred with a view to bringing
an asset into existence or
an advantage
or a benefit of an enduring nature
for the business, is treated as capital expenditure.

5. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Revenue Expenditure
An expenditure incurred
for day-to-day running
of the business,
is treated as revenue expenditure.

6. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Deferred Revenue Expenditure
An 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.

7. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Components of Cost of Fixed Asset
1. 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.

8. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Revaluation of Assets
Generally not allowed unless there are valid and
compelling reasons.
These reasons & basis for revaluation must be
disclosed.
A class of assets is revalued and not an
individual one.
Increase in value is credited to Revaluation
Reserve a/c and decrease written off to Profit &
Loss a/c

9. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
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.

10. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Accounting for Fixed Assets
Asset Account Related Expense*
Land None
Property, Plant, Equipment Depreciation
Natural Resources Depletion
(like mines, oilfields )
Intangibles Amortization
* on income statement

11. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
Every 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.

12. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
Every 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.

13. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
In the Balance Sheet Assets are shown at
Gross Value
less Accumulated Depreciation
_________________________
Book Value

14. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
GAAP provide for several methods of depreciation –
we study these three
i ] Straight Line
ii ] Units of Production (UOP)
iii ] Written Down Value (WDV)

15. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
GAAP provide for several methods of depreciation –
we study these three
i ] Straight Line –
straight line depreciation allocates an equal
amount of expense each year during useful life
of the asset.

16. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
GAAP provide for several methods of depreciation –
we study these three
i ] 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 value
Calculation =
expected useful life in years

17. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
GAAP provide for several methods of depreciation – we study
these three
i ] Straight Line
ii ] Units of Production ( UOP )–
Method involves two step process
1. Calculate the UOP rate
= cost of asset less its residual value
divided by expected useful life in UOP

18. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
GAAP provide for several methods of depreciation – we study
these three
i ] Straight Line
ii ] Units of Production ( UOP )–
Method involves two step process
1. Calculate the UOP rate
2. Multiply the rate by actual UOP during the period.

19. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
GAAP provide for several methods of depreciation – we study
these three
i ] Straight Line
ii ] 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.

20. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
GAAP provide for several methods of depreciation – we study
these three
i ] Straight Line
ii ] Units of Production (UOP)
iii ] Written Down Value (WDV) –
- approved by Indian Income Tax laws.
- ignores residual value in the first year’s depreciation.

21. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Depreciation
i ] Straight Line
ii ] 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.

22. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Sale of Asset
at some point , fixed assets are no longer useful
and need to be sold, exchanged or discarded.
at this time asset account is credited &
accumulated depreciation is debited.

23. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
Sale of Asset
at some point , fixed assets are no longer useful and
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 is more
(less) than its book value, a gain (loss) is realized.
this is credited to (written off) profit & loss
account.

24. Financial Accounting
Accounting for Fixed Assets
Chapter Seven
“ 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”