Financial Accounting

Lecture 17

Fixed Assets

Fixed assets are those assets:

that have a long life, are used in the business for future generation of income, are not bought with the main purpose of resale.

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Fixed assets are also called Depreciable Assets

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Depreciation

Cost of the asset is charged to profit and loss account over its
life.

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Depreciation

Depreciation can be defined as follows:

It is a systematic allocation of the cost of a depreciable asset to expense over its useful life.

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Useful Life

Useful Life / Economic Life is the time period for machine is

expected to operate efficiently. It is the life for which a machine is estimated to provide more benefit than the cost to run it.

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No depreciation is charged on land.

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In case of Leased / Lease Hold Land the amount paid for it is

charged over the Life of Lease.

It is called Amortization.

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Grouping of Fixed Assets

Major groups of Fixed Assets:

Land Building Plant and Machinery Furniture and Fixtures Office Equipment Vehicles

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Recording

Purchase of a Fixed Asset

Debit Credit Asset Account (relevant classification) Cash / Bank or Payable Account

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Recording
Depreciation Two different accounts are used Depreciation Expense Account Accumulated Depreciation Account

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Accumulated Depreciation Account over the years the periodic depreciation is accumulated in this account.

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Book Value OR Written Down Value (WDV) Cost of the Asset Less Accumulated Depreciation

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Recording
Depreciation Debit Credit Depreciation Expense Account Accumulated Account

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Depreciation for the year is charged to: i. Cost of Goods Sold ii. Administrative Expenses iii. Selling Expenses

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In

balance sheet Fixed Assets are shown at Cost less Accumulated Depreciation i.e. Written Down Value (WDV)

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Recording the Depreciation

Journal Entry
Debit Depreciation Expense Account Credit Accumulated Depreciation Account Presentation Profit and Loss Account Revenue - Cost of Sales - Admin, Selling and Financial Expenses Balance Sheet Fixed Assets - Accumulated Depreciation

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Methods of Calculating Depreciation

Straight Line Method Reducing Balance or Written Down Value Method

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Residual Value

It is the estimated value of the asset at the end of its useful

life.

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Straight Line Method of Calculating Depreciation

Depreciation = (Cost Residual Value) / Life of The Asset

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Example Straight Line Method

Cost of the Asset Life of the Asset Annual Depreciation

= Rs. 100,000 = 5 years = 20 % of cost or Rs. 20,000

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Written Down Value Method

Cost of the Asset Annual Depreciation

= Rs. 100,000 = 20% Year 1 Depreciation = 20 % of 100,000= 20,000 Year 1 WDV = 100,000 20,000 = 80,000 Year 2 Depreciation = 20 % of 80,000 = 16,000 Year 2 WDV = 80,000 16,000= 64,000

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